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10 types of insurance (and 3 we recommend)

Despite our generally optimistic worldview, odds are something will happen to us that disrupts our ability to earn and make a living. For example, you may be in a vehicle accident, you or someone close to you could experience an illness or an injury, or you could lose your job. That’s why there are different insurance policies for nearly any tragedy that could happen in life.

When you boil it all down, insurance is really the science of managing risk. When it comes to managing each of those risks, you have two options:

  1. Take the risk. This means deciding that if the bad thing happens, you can afford to pay for it. This is also known as self-insuring. For example, if your smart phone slips out of your fingers and the screen shatters on the ground, you can always buy another one.
  2. Transfer the risk. This means getting insurance. When it comes to the highest risks and biggest expenses in life, transferring the risk to an insurance company makes sense. Imagine sustaining an injury that prevents you from supporting yourself or your family. To self-insure that risk, you’d probably have to save a million dollars, because that’s how much the average Canadian earns in a lifetime.

Most of us don’t think about risk until something bad happens, and it suddenly becomes clear that we could have done something to protect ourselves. But not to worry, if you’re reading this, there’s still time to take that step. In this article, we outline 10 common types of insurance, including 3 that we regularly recommend to make sure you’re protecting yourself and your family’s future.

 

1. Vehicle insurance

You’re probably familiar with this type of insurance, as all Canadian provinces and territories require drivers to have at least liability and accident coverage. That said, there is some optional insurance that you may have come across:

 

Collision

When your vehicle is damaged in an accident, collision insurance pays the cost of repairing or replacing it, minus the amount of your deductible. Collisions can involve another vehicle or an object, and each policy will have its own specifics on what’s included.

While it sounds like a standard form of insurance coverage that is included in your policy, collision coverage is not mandatory, but it is recommended (especially if you have a newer vehicle).

 

Comprehensive

Comprehensive insurance protects your car against damage from things other than a collision, as well as from theft. It covers a wide array of events that can damage your car, including vandalism, fires, rockslides, twisters, animal attacks, and so much more.

It’s interesting to note that insurance premiums vary by gender, with women paying 5% less on average. This can be explained by the fact that the accidental death rate for men in car accidents  is almost three times higher than for women.

While vehicle insurance is important, it’s not something that we include in our financial plans because, if you have a car, you’ve already got vehicle insurance.

 

2. Extended health

Canada is a really wonderful place, and we’re not just talking about the maple syrup, mountain ranges, and friendly people. Canada is also considered a great place to live because of a public healthcare system that, while not perfect, covers most of the medical needs of its citizens.

However, there are many medical costs that are not covered under our public system, and that’s where extended health insurance comes in. You may be one of the 20 million Canadians who have this type of coverage at work and can use it to pay for things like physiotherapy, chiropractic, massages, nurse visits, dental work and more.

When you work with Planswell, this is the kind of thing we’ll discuss with you as it can have an impact on your plan and types of insurance we’ll recommend for you.

 

3. Travel insurance

When you’re about to head out on vacation, you’re likely going to disconnect, relax or have some sort of  adventure.

We certainly don’t want to think about all the negative things that can happen – lost luggage, trip interruption or a medical emergency – but these things can and do happen. What can compound an already challenging situation is if you’re in an unfamiliar country, with different rules, customs and languages.

If you’re concerned about anything like this going wrong on your trip, it’s a good idea to consider travel medical insurance, trip cancellation, and baggage insurance.

 

4. Long-term care insurance

While much less common in Canada than in the United States, long-term care insurance protects a person’s financial resources if something happens to their health in retirement. The policy would cover things like in-home care to help you dress and eat. It could also help provide care in a facility such as a nursing home.

We don’t typically recommend this insurance, though. It’s not a hard and fast rule, but in general we find that with adequate retirement savings, it’s not needed. In addition, many of the critical illness and disability insurance policies that we recommend have a provision that allows them to convert into long-term care insurance when you retire.

 

5. Mortgage insurance

A home purchase can be stressful, emotional and downright complicated. With so much going on, misinformation is easily spread and people push products that aren’t necessarily in your best interest. In our opinion, mortgage insurance often falls into this category.

By law, your mortgage broker is obligated to tell you about mortgage insurance when you’re signing your documents. You also must get mortgage insurance if you put less than 20% down payment on your home in Canada. Its purpose is to repay your mortgage lender any outstanding balance if you die. That’s a pretty sweet deal for the lender… but not as much for you.

Life insurance is usually a better alternative. If anything happens to you, your beneficiaries will receive the money directly in cash, tax-free. They can then choose to pay off the mortgage completely, or continue paying it off over time.

Another thing that makes life insurance better than mortgage insurance? It’s usually way less expensive, and covers you for more things. And when you work with Planswell, the exact right amount of insurance is calculated to take into consideration all the things you need to protect, not just the balance on your mortgage.

With that said, mortgage insurance is usually very quick and easy to put in place, and there are scenarios where life insurance isn’t necessarily available.

 

6. Homeowners/ renters insurance

Insurance is important for almost everyone who owns or rents a home. Especially when you own your home, not having insurance could be disastrous if it were to burn down, because in most cases you have a mortgage on it and might not have an extra few hundred thousand dollars lying around to replace it.

We recommend setting the deductible at a level that’s comfortable to you. For example, if an unexpected expense of $500, $1,000, or $3,000 were to come up, would you be able to cover it without going into debt? If the answer is yes, then you can match your deductible to the amount that you’re comfortable covering. As a bonus, if you’re able to raise your deductible, you’ll generally get a lower premium in return.

Renters insurance (sometimes called ‘tenants insurance’) policies are usually quite affordable, ranging from $15-$25+ per month, and can cover you for assets of $30k-$100k typically.

Renters insurance covers your personal property in case of fire, theft or vandalism, and will even cover expenses like putting you up in a hotel if any of these things happen to you.

 

7. Business insurance

Business insurance is a vast area. Unless you’re a CEO, COO or C-something else, you probably don’t need to research it too much. But here’s a quick summary of some of the more popular uses of insurance in business:

 

Key person insurance

Many businesses have key people that they rely on, whether it’s a brilliant scientist, a financial wizard or some type of creative genius. Key person insurance is essentially life or disability insurance on that person with a business as the beneficiary. That way, if something happens to the key person, the business has some money to sustain itself while it waits for them to get better or looks for a replacement.

 

Buy/sell insurance

This is a common form of business insurance that business partners will often put in place. Without it, a business partner could pass away, the surviving partner would suddenly find themselves in business with their heirs, such as a spouse or children. But with insurance in place, the surviving partner gets money to buy out their deceased partner and continue to run the business on their own.

 

Business interruption insurance

What if a natural disaster puts you out of business? Business interruption insurance (also known as business income insurance or “act of god” insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster.

This is just the tip of the iceberg. If you’re a business owner, we’d be happy to share details surrounding things like business overhead expense insurance, corporate participating life insurance, business loan protectors and many, many more.

 

8. Life insurance (recommended)

Life insurance follows an important principle: “Only insure what you couldn’t afford to lose.”

If you have children or a spouse that wouldn’t be able to maintain their standard of living without your income, then this type of insurance is a way to insure your earning ability. The idea is to take out a policy with the right amount of coverage that the insurance benefit could be invested to create long-term income. This income could help your family maintain the same home, schools, vacations, and other lifestyle factors that they currently enjoy.

Canadians are definitely seeing the benefit of life insurance, with ownership of these types of policies growing almost 5% per year since 2004. It’s also important to understand that there are two basic kinds of life insurance: 

 

Term Life

Term life insurance is the most simple and cost-effective choice for most people. You simply specify how much coverage you need and how long you need it. When the term expires, you can take out another policy if you still need the insurance.

 

Permanent Life (a.k.a. whole life or universal life)

These policies are “permanent,” meaning they never expire. They also add the possibility of building up an investment within your policy that you may be able to cash or borrow against in the future.

The downside of whole life insurance is that it is much more expensive and complicated than term life, and usually not something we recommend. One exception is wealthy individuals who can benefit from the ability to borrow against the policy to extract money from a holding company in a tax-efficient manner. If this sounds like you, we can show you exactly how this works.

 

9. Disability insurance

Roughly 1 in 3 people will become disabled for at least 90 days during their working tenure due to an illness, accident or injury at some point in their lives. This could be from something that happens on the job or something in your private life, such as a car accident, a back injury or a medical disease.

Disability insurance pays a tax-free, monthly benefit equal to 65% of your salary until you’re able to work again or until age 65, whichever comes first. This amount is designed to give you comparable take-home pay to when you were working.

Why is that important for a financial plan? Well, your financial plan is built on the assumption that you’ll earn a steady income throughout your working years. But if that income gets interrupted, it could derail your plan pretty significantly, forcing you to retire later or work in retirement.

Even a minor financial setback can not only derail your plans for retirement, it can put you and your family in difficult situations. With disability insurance, there are no interruptions to your income meaning you’ll stay on track towards your retirement goals and keeping your family financially secure.

If you have benefits at work, you may already have some disability insurance. If that’s the case, we can help you take a look and make sure you’re properly covered.

 

10. Critical illness insurance

Critical Illness insurance is sometimes called insurance for your savings account.

Why? Because if you come down with something serious like cancer or heart disease, you may very well make a full recovery, but you’ll probably have dipped into your savings account to cover missed work as well as healthcare expenses.

These expenses can include drugs, physiotherapy, mobility devices, in-home care and more. There might also be a desire to seek treatments that go beyond what our public health system can provide, like specialized treatments outside of Canada, or expensive pharmaceuticals that can cost hundreds of dollars per day.

Critical illness policies typically cover about 20 of the most serious and common illnesses. The reason to have this type of insurance is similar to disability insurance.

As our insurance calculator shows us, dipping into your savings at some point before retirement can leave you far short of your goals. With critical illness coverage in place helps smooth things out, keep you pace to reach your goals, and keeps your with the peace of mind knowing that if something were to happen – you’re prepared for it.

 

Where to begin?

Insurance is a topic that’s often either ignored, mis-communicated, or just something that’s continually pushed back for another conversation later down the road.

Regardless of your overall thoughts when it comes to insurance, it exists for one main purpose: to protect us (including our assets and our family) against anything that might put us in harm.

If you’re not sure exactly where to begin or know what types of insurance might be beneficial for your situation, we’re here to help. You can easily book a call with one of our amazing Plan Pros to get information on having the right protection in place is fundamental to your financial plan, supporting your retirement and short-term goals.

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