HFI Financial

Keith L. Hatton, CFP, CLU, ChFC, TEP

The following article first appeared in The Financial post Guide to investing & Personal Finance - Insurance Planning

Insuring for a healthy life as well
as against an untimely death

Jonathan Chevreau

Life is all about risk. Insurance is the art of hedging against the multiple risks we all face as we move through our lives.

"Even the best designed financial plans for individuals, families and their businesses face three fundamental risks," says Bill Strain, executive vice-president with PPI Financial Group. The family breadwinners may die too soon, become disabled, or live too long.

He defines insurance as being a "business of risk intermediation."

The articles in this section explore the various types of insurance available in the Canadian market. These include the traditional big three of life insurance, auto insurance and house insurance. But, increasingly, it's becoming necessary to provide for "living benefits" that kick in not when we die but when we become disabled (disability insurance), critically ill through cancer, stroke and similar calamities (critical illness insurance) and to care for us in an advanced but perhaps infirm old age (long-term care insurance).

As Strain points out, there is risk living too long as well as dying young. As he puts it, "increasing longevity increases the risk of outliving your money and incurring greater long-term health care costs."

As insurance products evolve, they are becoming more complex, he says. The pace of innovation in the life insurance marketplace has been particularly frenetic, as products move from concept to delivery in months rather than years.

The rise of the personal computer has allowed insurance agents to build many more options into product offerings, empowering financial planners and agents to tailor insurance products to various "what-if" scenarios involving their clients. "No longer does one size fit all," Strain says.

Insurance professionals also must accept greater responsibility for keeping clients informed about the risks as well as the rewards of some of the more aggressive strategies.

Examples of this are provided in the articles on leveraged life insurance in the Retirement Planning section of this Investing Guide.

Leveraged life plans aim to provide high net worth investors with a tax-free flow of retirement income. This is achieved through a type of life insurance known as universal life and by using the investment savings portion of the policy as collateral for a series of bank loans. The loans are repaid with the death benefit and, theoretically, a tidy nest egg remains for your beneficiaries.

With participating whole life and universal life insurance products, the policyholders assume an underlying investment risk, whether or not they realize it, Strain says.

Faced with a precipitous decline in interest rates in recent years, disgruntled policyholders have found the actual returns on their universal life and participating whole life polices have not lived up to the initial promises. This has given rise to "vanishing premium" cases in North America. In either case, Strain and other insurance. professionals counsel full and fair disclosure of the assumptions and guarantees laid out in sales illustrations of such products.

Insurance is generally available through "group" plans at work, or purchased individually to supplement group coverage. There is also a measure of insurance in certain government programs, such as the disability provisions of the Canada Pension Plan and Workers Compensation.

If you want to buy individual insurance, you'll generally have to choose between captive sales people married to one supplier or more independent brokers who try to shop the market for you.

Differences in policy premiums and benefits can be vast, as is apparent in the case of automobile insurance in Ontario. In this case, consumer hot-lines like the Consumer's Guide to Insurance, can help you choose.

Strain says innovations in insurance will be driven by clients, especially the demographic wave of aging baby boomers. That alone will make long-term health care and related insurance a booming business. The U.S. is well advanced in this market but as health costs rise in Canada, more families here will look to privately financed care through insurance.

Strain envisages an era in which well-off consumers build pools of investments through the tax-deferred mechanisms of universal life policies.

Increasingly, these will be used to fund benefits for long-term care, critical illness and disability. Products may combine various combinations of what to date have been sold on a piecemeal basis. "Rather than using stand-alone products to indemnify a particular risk, tomorrow's products may adopt a more holistic approach," Strain predicts. Such policies would not only insure but "offer the ability to accumulate tax-sheltered supplementary retirement savings" over and above registered pensions plans and RRSPs.

Even more revolutionary would be flexible multiple life policies that would cover several lives and "introduce the potential for some co-insurance with the policyholder."

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Last modified: December 14, 2008