The article “How To Choose The Right Insurance” was originally published on MoneySense on October 31, 2017.
Tara isn’t sure if mortgage, life or disability insurance is the right way to go for her and her husband.
Q: My husband is 57 and I am 45. I am currently a stay at home mom to a 12-year old with autism. We have life and disability insurance on our mortgage. My husband no longer qualifies for critical illness through our bank as he is 57.
He also has short term and long-term benefits through his employer.
Should we switch to term insurance through a private insurance company for our insurance instead of paying $292 biweekly for mortgage life and disability? Can we even get disability insurance through a private insurance company? Also, should I keep this insurance since I am not employed?
—Tara
A: Insurance can be a bit of a pain. It can be expensive and often, it’s simply a sunk cost.
But when you need it, insurance is really important. And when it comes to managing financial risk, it is essential for most young families.
Your husband, Tara, likely has a real need for life and disability insurance. If you and your son would be in financial difficulty if he died, he needs life insurance. And if the three of you would be in financial difficulty if he couldn’t work due to a disability, he needs disability insurance.
Given he’s still working and you have a mortgage, I’m going to guess that you guys need insurance. How much is highly dependent on personal factors and can be assessed with the help of a professional.
Your mortgage insurance is probably expensive though. It’s a frequent add-on when you apply for your mortgage that you might not think much about before you agree to it. Your mortgage specialist is definitely thinking about it, because they are compensated nicely to sell it to you.
$292 biweekly for your mortgage insurance is $7,592 per year – that’s a huge cost – and I’d be willing to bet you could get much more coverage unbundling the insurance from your mortgage.
Your husband’s group life and disability insurance is probably more reasonably priced and some or all of the cost may be paid by his employer. This is an important consideration, particularly with disability insurance, as if his employer pays the premiums and he needs to collect disability insurance, the income will be taxable to him. If he pays the premiums, the disability insurance, if he were ever disabled, would be received tax-free. It certainly minimizes how comprehensive the coverage is if the disability income could be taxable.
One problem with group life and disability insurance is that it isn’t guaranteed. Whether it’s a change in the group plan or a change of employment – even a termination – your husband could find his coverage changes through no decision of his own. Group disability insurance is also quite often more difficult to continue receiving after the first two years of a disability. This is certainly a vote in favour of some complementary third-party coverage – just not as part of your mortgage, Tara.
Life and disability insurance are probably necessities for your husband at this point. Critical illness insurance, that pays a lump-sum benefit if your husband develops a critical illness, may be supplementary. I say this because if your husband develops cancer and can’t work, disability insurance should replace his income. If the cancer is really bad and he dies, his life insurance will replace his income. Critical illness can provide funds for treatment, help around the house and so on, but I’d definitely rank it number three in your husband’s priority list.
Your bank may not offer critical illness insurance to your husband at his age, but at 57, there are other insurers who will – so don’t stop at your bank, Tara.
Critical illness insurance could be a good option for you to consider for yourself, given that if you were to develop a critical illness, the family may really need the cash. You can’t get disability insurance as a stay-at-home mother, because you don’t have an income to replace. But you most certainly have a job to replace and your family could have a huge financial cost if you weren’t able to take care of your son.
Using the same logic, Tara, you could probably use some life insurance as well to help provide for your son and your husband if you were gone and couldn’t care for him.
Insurance is one of those things that you buy and hope is a total waste of money. Nobody wants bad things to happen to them or their family, but I can assure you that bad things can happen if you’re not properly insured.
In my humble opinion, the insurance industry can sometimes be a little “salesy” on insurance and not all agents do a good job helping people understand and prioritize their insurance needs. Find a good professional to help you guys assess those needs, Tara, before you replace your expensive mortgage insurance.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
