Thousands of crash test dummies have been sacrificed for the sake of our driving safety and I'm grateful every time I climb behind the wheel.
We also need to crash test important components of a financial plan like your mortgage against the financial catastrophe caused by disability, critical illness and death.
These risks are very real. For instance, before age 65, a 40-year-old non-smoking male has a 34.7 per cent chance of a long-term disability, a 27.8 per cent chance of a critical illness and a 7.0 per cent chance of dying. The combined chance that he will die, become disabled or critically ill before age 65 is 59.3 per cent.
Likewise, by 65, a 35-year-old non-smoking female has a 40.3 per cent chance of a long-term disability, a 20.5 per cent chance of a critical illness and a 5.6 per cent chance of dying. The chance that she will die, become disabled or critically ill before age 65 is 55.8 per cent.
These life events can be absolutely devastating to a family. Life, disability and critical illness insurance replace the value of a person's income if those disasters strike and also reduce or eliminate the pressure of financial obligations like mortgages.
Mortgage protection insurance is an easily understood option that a lender must present to you when finalizing your mortgage details. However, there is usually no time to think about it and you may end up signing without going through a proper planning process. Although you are not required to apply for the coverage, not many people feel comfortable signing the waiver declining it.
There are compelling reasons to arrange your insurance affairs independently rather than through your lender. The primary issue is one of control. By working with an independent insurance professional, you'll be able to structure a plan where you control all facets of your coverage including the coverage amount, type, options, timeframe and beneficiaries. You'll also be able to take your plan with you without re-qualifying when you change lenders (and you probably will).
By defaulting to the coverage issued through your lender, you limit yourself to that option, thereby ignoring the tremendous competition in our vibrant Canadian insurance marketplace. The lender is beneficiary of this policy and the coverage is tied directly to the mortgage amount, regardless of your other insurance needs. You are usually prevented from taking the coverage with you if you switch lenders and will need to medically re-qualify. This can be a problem if you develop any health issues.
Your priority is to protect your interests and those of your family - not your lender. A glossy mortgage protection brochure does not do your financial plan justice.
You really need to work with a specialist who can professionally analyze your needs and existing coverage, structure a proper plan and source the best options available in the insurance marketplace.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a Certified Financial Planner and owner of WealthSmart Financial Group in Richmond, BC, www.wealthsmart.ca.
