Mortgage Insurance: Not always a sure thing

IN DENIAL: Feb. 6, 2008

If you have a mortgage on your home, chances are good you also have mortgage insurance. The idea is that if you should become seriously ill or die before paying off the mortgage, the coverage will kick in and pay it off for you. It’s meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you.

The reality falls a little short of that. In this week’s Marketplace investigation, we meet two families who bought the coverage and thought they were protected, only to have their claims denied when they became sick or died. In each case, the insurer said the applicant person had lied on their initial application form.

It turns out a routine test at the doctor could be reason to deny your claim, if you don't mention it. Had a cuff inflated on your bicep? That counts as being tested for high blood pressure.

As Erica Johnson reports, the bank staffers selling mortgage insurance are unlicenced and rarely trained to explain the details and legalities of those insurance products. The result is people who pay premiums and think they are covered, only to realize later that they are not.

WATCH THE SHOW THAT MILLIONS OF CANADIANS SAW ON TV AND BECAME AWARE HOW MORTGAGE INSURANCE REALLY WORKS: http://www.cbc.ca/marketplace/in_denial/

Accidental death insurance makes no sense

If you're going to spend the money, more term insurance is your better bet.
By Duncan Hood

Every time you turn on the news you hear about people dying in accidents. So it’s no wonder that many of us buy accidental death insurance, either as a standalone policy, or as a rider on an existing policy. The insurance is designed to provide for your family should you be killed in a mishap, such as a car crash or fall.

There’s only one problem with accidental death insurance, says Lorne Marr, president of LSM Insurance in Markham, Ont. “It doesn’t make any sense.” Accidental deaths are rare, accounting for only about 5% of mortality. But accidental death insurance often costs more than a term life policy that would cover you no matter how you die.

“Aside from the coverage offering poor value,” says Marr, an independent insurance broker with 14 years of experience, “the biggest reason I wouldn’t buy it is because my family doesn’t need more money just because I happen to die in an accident.” In fact, your family’s costs would likely be higher if you were to die from cancer or some other disease, which is a much more common cause of death than accidents.

Anne Kleffner, associate professor of risk management and insurance at the University of Calgary, agrees that accidental death insurance makes no sense. “If you’ve bought the right amount of life insurance to begin with, it seems a bit silly to then spend more money for coverage you can only use if there’s an accidental death.”

So what should you do if you get an offer from your bank or insurance company for accidental death insurance? If you don’t think you have enough coverage, “you should just buy more term insurance instead,” says Kleffner. “It’s pretty clear that the accidental death coverage is not worthwhile.”

source: http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20071129_162341_5252

How Much Term Life Insurance Do You Need?

Million Dollar Journey
Building Wealth through Saving and Investing

Written by FrugalTrader on Aug 20, 2007 filed under Insurance

You’re probably assuming that I know the answer to the post title, but unfortunately I don’t have an exact answer. Like most personal finance issues, it really depends on your current situation.

I believe that life insurance is a means of protection, not a means of making someone rich. To clarify, term life (not universal life insurance) should be used to protect the people dependent on your cash flow. On top of that, I feel that people should work towards building their asset base so that they eventually won’t need insurance. That’s why term life works so well. It covers you when you NEED the insurance while you’re young, but 20 years down the road hopefully your debt will be low along with enough assets to cover the needs of your dependents (if you have any at this point).

Personally, with both my wife and I working with decent salaries, we don’t “depend” on each other for cash flow. If one of us were to pass away the only real financial pain we would face would be our biggest debt, our mortgage. So in my specific situation, I would be comfortable with getting enough term insurance to cover the mortgage.

When we do have children, the whole insurance picture changes drastically. Now, not only do we need enough term life to cover our debts, but now we need to replace income to raise a child in case one of us passed away. So how much do we need to cover a child? Realistically, assuming that the insurance covers all debts, one of us should have no problem raising a child (financially speaking). However, what about larger future purchases like college/university or the cost of a nanny care to help out with single parenthood? Perhaps enough insurance (on top of debt payment) to put a lump sum into a RESP (you can do this with the new RESP rules), and a bit extra to cover other child are expenses.

In conclusion, life insurance is meant to help reduce the financial burden faced by the
beneficiary. With that in mind, you’ll need a lot less life insurance than what most insurance reps will recommend. However, every situation is different. If you have dependents, sit down with your spouse and have a chat about the worst case scenarios. How much would you need to minimize the financial burden in case one spouse passed away?

What are your thoughts on the amount of life insurance needed?

source: http://www.milliondollarjourney.com/how-much-term-life-insurance-do-you-need.htm

Universal Life Insurance – Part 2 by Ed Rempel

Million Dollar Journey
Building Wealth through Saving and Investing

Written by Ed Rempel on Jul 17, 2007 filed under Insurance

Continuing from yesterday's Universal Life Insurance article (Part 1), Ed Rempel now explains the various disadvantages of Universal Life Insurance.

So, do we NEED universal life insurance? The main life insurance need most people have is income replacement. If you have anyone that is financially dependent on you (your family) and you want to know they will be okay if you die, you probably need to have some life insurance to replace that part of your income that they would need to be okay.

The need for income replacement goes away with time, though. When you retire (we call it being “financially independent”), you can live fine without working. By then, your kids are usually adults and are no longer dependent on you. Your spouse will get your investments and much of your pension, so most people have little or no income replacement need once they retire.
What life insurance do you need after that? Here is where an insurance salesperson often needs to “create” a need. The main needs usually used are taxes on your estate and avoiding probate fees.

If your estate is mostly illiquid assets that your kids will want to keep, such as a cottage, then taxes on your estate are a problem. You give your kids the cottage, but your estate first needs to pay the capital gains tax, which can be a lot. If you have no investments, then they can only pay it by selling the cottage.

For most people, however, your main assets are your RRSP’s and your house (which your kids won’t keep). So your estate has lots of cash. If your estate is $1 million and there will be $200,000 tax when you die, all that means is your kids get $800,000 instead of $1 million. Is this worth paying life insurance premiums all your life for?

Paying probate fees take some effort to be made to seem important. They can be $10,000 (on a $1 million estate)! Wow! But when you look at the numbers, you can see through it. Probate fees are between .5% and 1.5% of the assets passed by the will. Since the insurance policy names a beneficiary, the death benefit passes outside the will, so you avoid the probate fees.

However, life insurance premiums for minimum universal life are usually at least 1% of the death benefit each year. Getting 10 or 20-year term is only about 1/3 the cost. So, if you live for 2 years, you have probably already wasted more in excess premiums than your estate will one day save in probate fees.

In short, most of our clients are in their 30’s, 40’s and 50’s. Do they need insurance for life? Who knows? They usually need income replacement insurance now and to build wealth for retirement. But there is nothing that tells us they will need life insurance after they are “financially independent”. This is probably true for at least 95% of the population.

If you don’t have a need for insurance for life, then universal life insurance is a waste of money. And if you do, only buy it if it is cheaper than term 100.

The other question relates to the investments. Universal life allows you to pay extra into the policy to invest. Is investing in a universal life insurance policy a good idea?

The “need” created is usually tax deferred growth, avoiding income tax on your estate (again) and avoiding probate fees (again). However, you can get the same tax deferred growth by buying corporate class mutual funds. And the other 2 are rarely worth paying the premiums all your life.

There are some major disadvantages of investing in a UL policy:

source: http://www.milliondollarjourney.com/universal-life-insurance-part-2.htm

Univeral Life Insurance - Part 1 by Ed Rempel

Million Dollar Journey
Building Wealth through Saving and Investing

Written by Ed Rempel on Jul 16, 2007 filed under Insurance

Ed Rempel, a CFP and CMA, is a regular guest writer here on Million Dollar Journey. Today, he has written an informative and opinionated article regarding Universal Life Insurance. A must read for those contemplating different types of insurance. This is Part 1 of 2.

There is a saying in the insurance industry – “If the only tool you have is a hammer, then every problem looks like a nail.”

There should be a comedy show about many insurance seminars. Insurance advisors are trained to:

"Create a need (for insurance) and then fill it.”

“What we do is find a scab and then pick it.”

Universal life (UL) is one of those products that I believe is vastly overused. It takes a bit of work to invent a need for it, but with some practice, it is often sold anyway.

My opinion is that universal life, for most people, amounts to paying for insurance you don’t need so that you have the option to limit your investment choices.

First of all, what is universal life insurance? Essentially it is term for life plus the option of buying investments in your policy.

We can all understand term insurance. We buy a 20-year term. If we are still alive after 20 years, then it was a complete waste of money. But that is what we normally want – for insurance to be a complete waste of money. It is the cheapest insurance and while we are alive, we know our loved ones will be looked after financially if something happens to us.

Term for life, usually called “term 100” means you pay a flat premium for life. It is more expensive because it will pay out some day, as opposed to term for 10 or 20 years which most likely will not pay out. In fact, term 100 usually pays out if you reach age 100 even if you are still alive. Then you can have a great party!

Universal life with a minimum premium payment is term 100. You can choose a higher premium and the extra amount is used to buy investments in the policy.

source: http://www.milliondollarjourney.com/universal-life-insurance-part-1.htm

TERM OR WHOLE LIFE?

Friday, September 29, 2006

For most people, the right type of life insurance can be summed up in a single word: term. But before we explain why, it's important to understand the differences between the most common types of insurance available. Our glossary can help with that, and decipher some of the more common insurance lingo.

The basic difference between term and whole life insurance is this: A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against. The three most common types of whole life insurance are traditional whole life policies, universal and variable. With both whole life and term, you can lock in the same monthly payment over the life of the policy.

Forced Savings
Whole life insurance is expensive: You're paying not only for insurance but also for the investment portion. That extra cost might almost be worth it if these policies were a good investment vehicle. But usually they aren't. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement."

Leaving aside the fact that there are many better ways to save for retirement, these policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return. On top of that, there are up-front (but hidden) commissions that are typically 100% of your first year's premium. Worse, it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment.

Premiums for term insurance are downright cheap for people in good health up to about age 50. After that age, premiums start to get progressively more expensive. The same holds true for whole life policies, though people who need coverage starting in their 60s and beyond may have no alternative but to buy whole life. Most companies simply won't sell term policies to people over about age 65.

Term: Where the Value Is
To get a real sense of the value of term, let's compare a term policy and a universal life policy. Say a 40-year-old nonsmoking male has a choice between a $250,000 Met Life universal policy with a $3,000 annual premium and a same amount of renewable term coverage with a 20-year fixed premium of $350. At the end of one year, the universal policy, assuming it paid 5.7% per year, tax-deferred, would have a cash value of exactly zero (cash value is the amount you would get back if you canceled the policy). But say he had instead invested $2,650 (the difference between $3,000 and $350) in a no-load mutual fund that averaged a total return of 10% annually. At the end of the first year, he'd have $2,841, accounting for taxes on the earnings at a 28% rate. At the end of 10 years, he would have accumulated more than $46,000 in after-tax savings in the mutual fund. Over the same period, the cash value of the policy would have climbed only to $31,819.

That's not to say that whole life insurance is always a bad idea. Wealthy people can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy. And for the growing number of people in their late 40s or early 50s who are just starting families, whole life is at least worth a look.

Sizing Up a Whole Life Policy
One of the great problems with whole life is only an expert can tell if a policy you own or are considering will ever become a decent investment. James Hunt, actuary for the Consumer Federation of America, who has analyzed thousands of policies, notes that whole life policies hardly ever yield a reasonable return unless held for 20 years or more. So if you buy one be prepared to pay into it for the very long haul.

The key to a whole life policy is its internal rate of return -- the yield on the policy after all fees and charges are subtracted. A competent analysis can determine at a minimum whether the weight of the fees and charges built into one of these policies will ever allow a worthwhile return. Such an analysis will also pinpoint the minimum amount of cash value that you can derive from a policy at any given time interval.

Some financial planners, actuaries and accountants can perform internal rate of return analysis on your policy. The Consumer Federation has a service that will do this, calculating the real return year by year and comparing it with other investments. The fee is $50 for the first policy, $35 for each additional. Call 603-224-2805 for more information.

Keep Your Old Policy?
You've been faithfully paying into that whole life policy a good pal of your brother-in-law sold you 10 years ago. And now you're thinking, "Hey wait a minute, I should be bailing out and getting a cheap term policy." Not so fast. First and foremost, keep in mind the substantial sum you've probably paid in over the years. How much will you get if you "surrender" or cash it in now? The answer to that question can be found in the illustrations you got when you signed on the dotted line. If you can't determine the surrender value you may have to -- heaven forbid -- call your agent and ask. But it's worth taking the trouble before you make a decision.

Most policies don't start to build decent a cash value until their 12th or 15th year. So if you cash in after 10 years, you could be out of a lot of money. And you can be sure that if you surrender in the first five years or so, practically every dime you put in will be down the toilet. The next thing you have to consider is whether you are still insurable at a reasonable rate if you switch to term. That's because you'll have to requalify medically. If you are over 50, smoke or have health problems, you may find it's cheaper to hold onto your old policy. Another option worth considering is a tax-free transfer of the value in your old policy into a better one, perhaps from a low-commission company like Ameritas (800-552-3553).

How to Check an Insurer's Ratings
If you're looking for whole life coverage or a term policy that you'll want to keep 20 or 30 years, the financial soundness of the insurer is a critical concern. You want some assurance the company will be around in case you aren't. For insurance companies, the major credit agencies like Standard & Poor's rate claims-paying ability.

Fortunately, information on the credit worthiness of insurance companies is easy to obtain. Reports are cheap or free over the Internet. You can always contact the insurance company and ask about its ratings, but it's best to get this information independently. In general, go with an insurer rated A or better; the most financially sound insurers are rated AAA, though some rating agencies use slightly different letter grades.

The premier Web site in terms of detail and ease of use, (best of all, it's free) is insure.com where you can get ratings online from Standard & Poor's as well comprehensive reports on individual insurers. Duff & Phelps ratings of claims-paying ability are available free at dcrco.com. AM Best ambest.com has a huge database, but you have to pay for it. While you can access ratings free of charge, a detailed company report will set you back $35.

Make sure any report you get is current, say within the last six months. Be extra careful to confirm ratings you'll find on many of the online quote services, which may be stale.

SOURCE: http://finance.yahoo.com/insurance/article/101749/Term_or_Whole_Life?

Does mortgage insurance make sense?

YOUR MONEY > Ask the Expert

Think twice before buying into one of the many pitches for different insurance products.

December 19, 2003: 9:31 AM EST

By Walter Updegrave, CNN/Money Contributing Columnist

NEW YORK (CNN/Money) - I am being offered mortgage protection insurance. Is it worth the cost?

-- James Lawrence, Tampa, Florida

Here, you're being offered the chance to buy an insurance policy that will repay your mortgage in the event of your death, disability or some incapacitating disease.

This offer -- typically by mail -- often comes from your lender or an insurance company affiliated with that lender.

This type of insurance is purely voluntary, however, so the question is, should you buy?

Generally, I'd say the answer is no.

It rarely makes sense to buy insurance for narrow reasons -- to insure against a specific disease or a single calamity or to provide funds to pay off a single liability, in this case your mortgage.

In the case of life insurance, for example, you're much better off analyzing your overall insurance need based on what kind of liabilities your spouse or other dependents would face and how much income they would have to replace if you were gone, and then buying enough insurance to meet that need.

Fact is, if you died tomorrow, your dependents would need to replace your income for a variety of reasons, not just to pay the mortgage.

Indeed, it might not even make sense to pay off the mortgage. Your spouse or other survivors might be better off continuing to pay the loan -- assuming that's possible -- and putting insurance proceeds to other purposes.

In other words, you should take your overall financial picture into account when buying life insurance.

And the way you should do that is to have a financial planner or life insurance agent perform what's known as a "needs analysis." You can also use any one of a number of insurance needs calculators online, including the calculators at The Life and Health Insurance Foundation for Education site and TIAA-Cref site.

Of course, that leaves the question of what type of insurance you should buy -- whole life, term, etc. -- and the issue of how to shop for the best price for a policy.

For more on those topics, see a column I wrote last year called "Life insurance made easy."

The same goes for disability insurance. You should consider a long-term disability insurance policy not just because you have an outstanding mortgage, but because you would likely need to generate income for a variety of reasons even if you were disabled and unable to work. For more on choosing a disability policy, click here.

All of this is not to say there isn't ever a situation in which mortgage life insurance might make sense. Since these policies are usually being mass marketed by mail, the health standards you must meet to buy one of them is usually much lower than for a regular life insurance policy.

So if you're in poor health and would likely face higher than usual premiums -- or might not qualify for a policy at all -- then you may want to consider a mortgage life insurance policy.

Even then, however, you'll want to check the policy's fine print for restrictions on covering pre-existing conditions as well or other qualifications that might restrict a payoff after your death.

Barring such a scenario, however, I'd say you're almost always better off taking a more holistic view of your insurance needs and then doing some careful shopping for a policy rather than signing up for a policy offered in an unsolicited pitch via mail.

source: http://money.cnn.com/2003/12/19/pf/expert/ask_expert/index.htm