I recently wrote and passed my provincial license for Life Insurance. The course was very intense, and, very comprehensive. It was also not easy. I am sure that just like most people, insurance is not one of my favorite topics. It seems that we, as the policy holders, are always paying but seldom receiving. I was not a fan of insurance companies before the course, and taking the course hasn’t changed my mind much. But now I understand the reasons behind what insurance companies do, and how the different products work. Insurance is based on numbers, not emotion. Just like all investing.
Because of the course though, I do have a better understanding of how the right insurance, of all kinds, can, and should, be a part of sound financial plan. I don’t care what you do, you work hard for your money!! Most people don’t work for fun, they work because they have bills to pay. The biggest problem with bills is they no respect for your money. Bills just keep coming. If your income stops for whatever reason, the bills will keep coming! Insurance is about what happens in that situation. It is a “what if” scenario.
You can ignore it and hope it never happens, or you can prepare ahead of time. Finding out that you have cancer, or getting disabled in a car crash, or at age 50, finding out you don’t have the resources to retire, is the wrong time to try and fix things.
There are as many reasons to have insurance as there are people. Like all things financial, no two people, or situations are the same. In the course they pointed out that there are only 2 conditions that need insurance. Permanent needs, and temporary needs. Permanent needs are based on dying. If you want to leave money to your family after you pass away, want to pay taxes on your estate, or leave money to charity, those are permanent needs, because you don’t know when you are going to die. In these cases, you need a type of Permanent insurance.
If you want to payoff a mortgage or credit card debt, assure money for your child’s education, or to replace income, should you die, then you need temporary insurance. Mortgages are normally only 25 years, and someday you should have your credit cards paid off, and by 25, kids should be done school, (hopefully), and someday you will retire. You might out live the need. So, the need is not forever.
Heaven forbid, this almost looks like you could need 2 different insurances. It might be cheaper to consider this, rather than trying to cover everything in one policy. When I was taking the course, and the exams, I found that a good guiding rule about how policies work was to keep two things in mind. Does this make the insurance company money, and what makes it less likely that the insurance company will have to pay out.
EVERY business is in business to make money!! Not only that, if you have a $1,000,000.00 insurance claim, the company needs to have the $1,000.000.00 to give you. Not much good paying for a policy, and then making a claim, and the insurance company doesn’t have the money. So, insurance can’t be free. Insurance companies are investing in the same markets you and I are. They face the same risks we do. I am not defending insurance companies, but it is what it is. You can play any game better if you know the rules.
Insurance is based on numbers and statistical reality. Therefore, certain things are a given. A 20 year old is statically less likely to die than a 65 year old. A high rise window washer, statically, is more likely to become disabled than a lawyer. A smoker is statically more likely to develop sickness than a non smoker. Someone who skydives is more likely to be hurt than someone who doesn’t.
These are all RISKS. The more likely it is for the insurance company to have to pay a claim, the more the insurance will cost. The reality is that between your payments, and the profit on investing that money over the life of the policy, that should add up to the value of the policy.
I did not realize that insurance companies do a lot of research on each person before a policy is issued. Just about every policy is judged on the individual. That is one of the reasons why an agent has to ask all those embarrassing questions. They are the first line for judging the insurability of the client. Every agent, and insurance company, is subject to strict confidentiality of information rules and guidelines.
A large part of the course was about how to determine how much insurance is needed, if any. There is the concept of being self insured. You have been smart all your life, and invested wisely, bought and sold real estate, and done what we talk about on this site. Your 50 years old and have a net worth of $2,500,000.00, no mortgage, kids are all gone and the house is paid off. You have more than enough residual income each month to pay the bills. Do you really need a life insurance policy??
When should you get interested in Insurance? Like all things financial, the sooner the better. Making the right decisions when you are young, can make the rest of your life much easier, or much harder. Based on statics young people pay the least for Insurance. Structuring the right policy, the right way, will allow you make adjustments as time goes on in the most cost effective manner.
You should also review your policy with your agent on a regular basis. If there is a change, waiting 3 years to make an adjustment will cost you more money than not waiting. For most insurances, AGE is a critical factor when it comes to premiums.