Buying insurance is not a decision that usually elicits euphoria. Most of us insure our property and our home without ever really asking questions.
In matters of personal insurance, however, the decision is sometimes more complex. As if protecting one’s income or assets were anything less spontaneous or normal than insuring one’s car or mobile device (a reference here to all the extended warranties that are now offered on all consumer goods!). However, if you are 40 years old and your income is $72,000 a year, a disability would deprive you of potential income of almost $3,350,000, if you cannot work until retirement as planned!
This week, I am answering a question received from our reader, David, who wonders about the merits and advantages of personal insurance. “I don’t like the idea of paying insurance ‘in a vacuum’ and thinking that there is nothing that comes back to me in the end, he writes to us. I prefer products that come with some form of investment, such as a return of premiums at the end of the contract. Is it a good strategy to take this on my salary insurance? »
First of all, I congratulate our reader for taking an interest in salary insurance. What we call in the jargon “living benefits” help protect your ability to generate income in the event of disability (either personally or protecting your business) resulting from illness or accident, or yet to avoid a disorderly disbursement of your assets in the event of a diagnosis.
Statistically, such an event is more likely to occur—and jeopardize your security and financial goals—compared to premature death before age 65. For example, for our reader, who is 42 years old and non-smoker, the odds of being diagnosed with a serious illness are five times higher than their odds of dying, and 3.6 times higher for prolonged disability ( more than 90 days).
First, let’s re-establish an important fact: contrary to popular belief and to what certain salespeople are claiming, the reimbursement of premiums referred to by our reader does not constitute a real investment.
It is an endorsement that can be added to various basic policies, such as disability insurance, critical illness insurance, overhead expense insurance or loan insurance.
Depending on the product, the reimbursement terms will vary, but the logic will remain the same: if you have made little or no claim during a period determined in the contract, you will receive the reimbursement of the premiums. There is therefore no financial risk: you will recover the premiums paid at the end of the term of your policy.
In my view, this is therefore a health lottery rather than a real investment. In fact, since this endorsement increases the premium, you will have paid more for your coverage if you have to claim it in the event of disability or diagnosis.
Also, one factor for our reader David to consider is that he will have to use more of his cash to pay a higher premium. This opens several questions. What is his tax rate and does he maximize his RRSP contribution room each year? Does he have children and, if so, has he opened an RESP to benefit from the generous government grants? Are there consumer debts with non-deductible interest that would benefit from being repaid on an accelerated basis with the same budget?
While it is true that a refund of premiums can sometimes be compared to a non-registered guaranteed investment, when its yield is more attractive, this argument does not hold water if the comparison were made taking into account the tax efficiency of the same investment in an RRSP or TFSA account.
Is it relevant or not?
These questions show that in a context of limited liquidity, paying more for this endorsement comes with opportunity costs that each person will assess according to their values, needs and fiscal reality. So you understand that the final recommendation will be based on many factors. Here are, for example, some situations that would justify taking an interest in this option.
Like pollen in the air these days, taking out salary insurance, although you understand its importance, can make it harder for you to breathe. Subscribing to this endorsement could, however, allow you to make peace with your choice and not remain without protection for “allergic” reasons.
Do you have a company through which you can have and pay salary insurance premiums for you and a group of employees (protection plan whose interest would then be deductible)? Be aware that the portion of the premium associated with the refund of premiums could be paid by the employees.
Do you insure your employees or a group of employees in order to offer them competitive benefits through an income replacement plan that you have created? These premiums are deductible for the company.