The last time you purchased insurance or made a contribution to your RRSP, did you think about how long you might live? According to recent statistics, Canadian men live just over 78 years on average, while women live about 83 years. Men are expected to spend 88.8% (68.3 years) of their life in good health, compared to 86.3% (70.8 years) for women.

Most people know that how long we can expect to live depends heavily on genetics, weight, smoking status, lifestyle choices and luck, but you may be surprised to know that where you live can also be a contributing factor. The old notion that living far away from the stress and dangers of a big city will help you live longer is inaccurate. With a large percentage of their populations living in cities with quick access to emergency medical care, British Columbia and Ontario had the highest average life expectancies at 81.2 years old and 81 years old, respectively. Alberta and Quebec were a close second at just over 80 years.

In the other provinces, Newfoundland and Labrador had the lowest life expectancy at 78.3 years old. In Nova Scotia, Manitoba and Saskatchewan, the average lifespan is just short of 80 years.

Canada's three northern territories have the lowest life expectancy. People in Nunavut usually die the youngest at an average of 72 years old. In the Yukon, people reach 77 years old on average and in the Northwest Territories, residents live to about 78 years old.

So now that you know how long you can expect to live, let’s look at how you might die.

The most common causes of death in Canada are heart disease, cancer, stroke, chronic lower respiratory diseases, and "accidental injury," a broad category that includes a lot of horribly unlucky stuff that just happens. Heart disease will take 1 in 5 of us. Your odds of death from cancer are 1 in 7 followed by stroke at 1 in 23. Your odds of death by injury (all injury types combined) are only about 1 in 36. This explains why life insurance costs several times more than accidental death insurance.

Here are a few interesting facts about death that could come in handy the next time you are struggling for an interesting topic of discussion at an old relative’s birthday party:

• The likelihood you’ll be killed by lightning is approximately 1 in 2,650,000 —your odds of winning a Lotto 649 jackpot are just under 1 in 14,000,000!
• While being interviewed by Dick Cavett, publisher Jerome Rodale was bragging that he was so healthy that he’d live to be 100 when he slumped over and died from a heart attack. The show was never aired.
• Seven breeds of dogs account for 98% of all fatal dog attacks. In order, they are: Pitbull, German Shepherd, Chow, Malamute, Husky, Wolf hybrids and the Akita. Your odds of dying in any given year from a dog attack: 1 in 10,876,179.
• The most expensive funeral in history was for Alexander the Great. In today’s dollars, it would cost over $600 million. Average cost of a funeral in Canada is approximately $7,000.
• A few months before he died in a car accident, James Dean starred in a driver safety commercial in which he stated, “drive safely; the life you save could be mine.” The odds of dying in a car accident are approximately 1 in 6,500.
• Worried about dying in a plane crash? You have the same odds that you will die from the collision of an asteroid hitting the earth in the next one hundred years: 1 in 500,000.
• Your lifetime odds of death by suicide are approximately 1 in 121, slightly better than your odds of death from falling down.
• In ancient Japan, it was thought that somewhere on a cat’s tail was a single hair that could restore the life of a dying person. Relatives would bring a cat to the dying so they could pluck a hair and try their luck. My guess is that this tradition became less popular when people realized that angry cats were actually accelerating the deaths of some unlucky people.
• The ideal moment for being cryogenically frozen is within 10 minutes before death.
• It’s a myth that more people commit suicide during the holidays.
• It’s impossible to kill yourself by holding your breath. Go ahead, give it a try…I DARE you.

In recent years, many Canadian home insurers have begun asking questions about dog ownership and, depending on the breed, impose policy exclusions, charge extra premiums, or decline home insurance applicants. These insurers maintain lists of breeds they consider problematic. These are not dogs that have already bitten someone (although that would be a problem) or lack training, they are breeds that are believed to have an above-average probability of inflicting a serious bite injury.

At the top of the list is the American Pit Bull Terrier and related breeds such as the American Staffordshire. These dogs are banned in Ontario and several municipalities across Canada. If your insurer underwrites dog ownership, it’s unlikely they will offer you insurance if you own this breed. Other high-risk dog breeds include the Rottweiler, Doberman, German Sheppard, Samoyed, Husky, Malamute, Chow, Akita, Wolfhound and several crossbreeds.

In the US, there are at least 75 breeds now appearing on various lists. These include breeds that many people would not suspect are a problem:

• AMERICAN BULLDOG
• AUSTRALIAN SHEPHERD
• BELGIAN SHEEPDOG
• BOSTON TERRIER
• BOXER
• BULLDOG
• FOX TERRIER
• FRENCH BULLDOG
• GOLDEN RETRIEVER
• GREAT DANE
• GREAT PYRANEES
• LABRADOR RETRIEVER
• LEONBERGER
• MASTIFF
• NEWFOUNDLAND
• PUG

If you are a responsible owner of one of these dog breeds, you may think it’s unfair of anyone to suggest that your pet is more dangerous than any other dog. The common argument is that there are “no bad dogs, just bad owners” and “all dogs are capable of inflicting a serious bite”. As a dog owner, I believe there is truth to these arguments. However, insurers make underwriting decisions based on their own claims experience, industry statistics, and actuarial assumptions. It is estimated that 460,000 Canadians are bitten by dogs every year and approximately 60 percent of victims are children. In the US, dog bite losses exceed $1 billion per year. These injuries account for approximately 1/3 of all homeowner’s insurance liability claims. Insurers have good reason to be cautious.

If you’ve been told by an insurer that your dog is considered too high a risk, shop around. There are companies that don’t have an issue with dog ownership or offer some flexibility. For example, the underwriter may approve your application if your dog has no history of aggression, is housed in a dog-run, or you are willing to accept an additional premium or policy exclusion.

You are also advised to check the liability section of your home insurance policy. Most cover liability for dog bites to specific maximums. However, if your dog bites someone, your insurance company will probably increase your premiums, exclude future dog-related claims from your coverage, or refuse to renew the policy.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com.

Disability insurance is the most complicated type of personal insurance you can own. Even experienced insurance agents can find it challenging, so I pity the poor lawyer that attempts to find enough time in the day to read and understand their policy.

If you’ve read my prior columns, you already know that there is a huge financial risk of going without disability insurance. As a result, it’s extremely important understand how your disability insurance will pay a benefit in the event of a claim. Without getting into too many details, here are 4 questions you should ask about your disability insurance:

1. How does my policy define an eligible disability?

Don’t assume that having an illness or injury that prevents you from working as a lawyer is enough to qualify you for a claim. Depending on the type of coverage you own, the definition of disabled can vary and significantly impact your ability to qualify for benefits.

A typical employer provided Long Term Disability (LTD) program provides the weakest level of protection. Most of these contracts define a total disability as “unable to perform the essential duties of your own occupation and not working elsewhere…”. If you can’t work as a lawyer, you should qualify for benefits. However, if your claim lasts longer than 24 months, most LTD plans will only continue your benefits if you are “unable to perform any occupation for which you are reasonably able to perform by education and training…”. This is the most rigid definition and is intended to cover only the most serious disabilities. If the insurer believes your disability is not preventing you from working in a different occupation, you will no longer be considered disabled and your benefit will cease.

A typical personally owned Disability Insurance (DI) policy offered to lawyers defines totally disabled as “unable to perform the essential duties of your regular occupation…”. This is essentially the same as the LTD definition with one major difference; the definition of Totally Disabled will not change to “any occupation” after 24 months on claim. As long as a disability prevents you from working as a lawyer and you are not working elsewhere, most DI policies will continue to pay you a benefit to age 65 and in some cases for life.

2. How much money will I receive if I am disabled?

Personally owned DI polices offer monthly benefits based on a percentage of income after expenses, but before taxes. When you apply for this insurance, you are required to submit to extensive financial and medical underwriting, but once your policy is issued, your monthly benefit will be exactly what is stated on the policy. It will not be recalculated based on your income immediately prior to being disabled or reduced by any unearned income you receive from other sources while on claim. Unearned income is income derived from sources other than working. This can include benefits from another disability plan such as Canada Pension Plan (CPP) or an LTD benefit.

Unlike DI, the LTD benefit may not necessarily be the amount stated on your policy. This is where things can get a bit complicated.

The initial benefit calculation for a typical LTD plan is simply stated as a percentage of your gross income as reported by your employer. Because of this simplification, an LTD plan may appear to offer more monthly benefit when compared with a DI policy as it’s based on gross income. For example, a gross income of $150,000 would typically translate to approximately $6,800 of LTD benefit. However, DI uses after expenses income, not gross. If we assume that the $150,000 income works out to be $125,000 after expenses, the monthly DI benefit would be approximately $5,600 per month.

While it sounds like LTD offers an $1,200 per month benefit advantage when compared to the DI in this example, at time of claim this may not be the case.

Unlike DI, the insurer is going to request proof of your pre-disability income if you submit a claim. If your income immediately prior to being disabled does not support your current disability benefit, the insurer will reduce it accordingly.

Assuming you are approved for the full amount of benefit you’ve purchased, the insurer will then calculate the maximum you may receive when your benefit is added to all other sources of unearned income. This is called an All Source Maximum and it is typically 85% of net after tax income for a non-taxable benefit (the most common LTD plan).

The impact this can have on an LTD benefit is best illustrated using our income example from above and assuming a lawyer with 2 dependent children and a net income (after taxes and expenses) of $7,250 per month. Based on a reported $12,500 gross monthly income, the lawyer is paying for a $6,800 LTD benefit. However, based on the insurer’s 85% all source maximum, the insurer will not allow this lawyer to collect more than $6,162 per month (85% of $7,250) from all sources of income.

If the lawyer goes on claim and qualifies for an additional $1,200 per month (taxable) from the CPP Disability benefit, the total of all sources of income is $8,000 ($6,800 LTD plus $1,200 CPP). As this exceeds the insurer’s $6, 162 All Source Maximum, the LTD benefit would be reduced by $1,838 per month. So, while this lawyer was paying for a $6,800 LTD benefit, the actual claim paid becomes $4,962 per month with another $1,200 payable by CPP for $6,162 per month in total.

A typical DI policy for lawyers does not have an All Source Maximum. So in the above example, the benefit would be $5,600, plus CPP for a total of $6,800 per month. That’s over $600 more per month and it provides significantly better contractual benefits when compared to LTD.

3. Do I have enough coverage?

If your annual income after expenses is $100,000, the maximum amount of benefit a DI insurer will allow you to purchase is approximately $4,800 per month. An annual income of $250,000 equates to about $8,900 per month of benefit and $400,000 annually would be covered by $11,700 of monthly benefit. As previously explained, LTD amounts may appear higher.

While most DI plans can easily cover very high incomes, most LTD benefits have overall maximums that are below the levels required for high income professionals. Check your coverage details, if your LTD benefit is equal to the policy maximum, you are probably under-insured.

4. What happens to my monthly benefit if I am well enough to return to work part-time?

It’s not uncommon to have a disability that does not prevent you from working part-time or even full-time at a reduced income. In my experience, approximately 40% of totally disabled lawyers are eventually able to return to work on a part-time basis. So knowing what your disability insurance will cover under these circumstances is important.

A typical employer provided LTD plan may continue to consider you totally disabled and pay you benefits while you participate in an approved rehab or in a return to work program. However, this is temporary and most insurers will terminate your LTD benefits when you are no longer totally disabled.

A personally owned DI policy typically includes benefits for partial disability claims. If you can return to work, but your disability prevents you from earning a portion of your pre-disability income (usually a minimum of 20%), you would be entitled to a percentage of your total disability benefit proportionate to your loss. For example, if your total disability benefit is $7,500 per month and your disability results in a 40% loss of pre-disability income, you may be eligible to 40% of your benefit ($3,000 per month).

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. Some or all of what I have described may not apply to your disability benefits. 

If you want to learn more about disability insurance before speaking to an insurance agent, The Canadian Bar Insurance Association (CBIA) offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. 

The possibility of losing any portion of your benefit due to your insurer’s insolvency has probably never crossed your mind. Why should it? After all, we live in a country with a carefully regulated and stable financial services industry. As a result, I think it’s unlikely that your insurer will become insolvent. However, there is a risk, albeit a very small one, and it has happened three times.

In 1992, Les Coopérants became the first Canadian insurance company to become insolvent. This was followed by Sovereign Life in 1993 and Confederation Life in 1994. This affected over 1.1 million Canadian policy holders and over 2.1 million employees insured through employer group plans (10% of the Canadian population).

Fortunately, very few people were negatively impacted. Thanks to industry guarantees, 96% of Sovereign Life clients had no loss of benefits. Of the 4% remaining, no one lost more than 10% of their original benefit. When the largest of the three, Confederation Life, became insolvent, its policy holders eventually retained 100% of their benefits.

So what protection do you have if your insurer becomes insolvent? 

Canadian policyholders are protected by Assuris if their life insurance company should fail. Founded in 1990, Assuris is an insurance industry funded organization designated by the federal Minister of Finance under the Insurance Companies Act of Canada, and specified in the Quebec Règlement d'application de la Loi sur les assurances. Every life insurance company authorized to sell insurance policies in Canada (except fraternal benefit societies) is required to be a member of Assuris as long as they have in-force policy holders. Benefit guarantees are funded by a large cash reserve and if required, additional member company assessments. As a result, Assuris has the capacity to deal with any failure.

Assuris protects policy holder benefits by guaranteeing up to a fixed maximum amount or 85% of the total (whichever is higher) of the promised life, disability monthly income or health insurance benefits and ensuring a quick transfer of policies to a solvent company. Assuris also guarantees cash values, critical illness, long term care, segregated funds, TFSA’s, and annuities. The Assuris guarantee on accumulated values is 100% up to a $100,000 maximum.

It’s important to understand that Assuris protection applies separately to each insurance company and in the event of insolvency the maximum guarantees are applied to the combined total of all similar benefits with that insurer.

Life insurance policies provide a good example of how Assuris would apply their combined maximum guarantee. If you owned separate term life and whole life polices with the same insurer, the benefits would be added together (death benefits) to determine your guaranteed benefit amount.

The current Assuris maximum guarantee for death benefits is up to $200,000 or 85% of the total, whichever is higher. If you owned a $100,000 term life policy and a $50,000 of whole life policy with the same insurer, you would be guaranteed the full $150,000 benefit as it falls below the $200,000 maximum. However, if your total combined death benefit with the insolvent insurer was $500,000, you are guaranteed 85% of the total for a $425,000 maximum.

Remember, the Assuris guarantees are merely your worst case scenario. It’s possible that you would retain 100% of your benefits through a liquidation of the insurer and the assumption of your policy by other solvent insurers. This is what happened to Confederation Life policy holder benefits. Assuris partnered with the regulator and the liquidator to leverage lessons learned in previous insolvencies and the result was full recovery for policyholders.

The current Assuris guarantees are as follows:

[Source: Assuris September 2011]

If the possibility of losing even a small amount of benefit is a genuine concern, there are a few ways you can eliminate your risk.

One tactic is to avoid having all your eggs in one basket. By purchasing policies with different insurers at benefit amounts at or below the Assuris maximums, you can retain 100% of your benefit should an insurer become insolvent. However, this tactic could easily double your insurance costs.

For example, if a 42 year old male non-smoker bought five $100,000 10 year term life policies from five different insurance companies, he would pay $823 per year. However, a single $500,000 policy from one company would cost only $405 per year. The five separate $100,000 policies would be 100% protected by Assuris, while the single $500,000 policy is guaranteed at $425,000 (85%).

Another approach is to match the 85% guarantee with your actual benefit need by purchasing more than you actually need (if you can). If your insurer becomes insolvent and you cannot recover more than the 85% Assuris benefit guarantee, you will at least retain an amount equal to your original need.

For example, assuming an actual life insurance need of $500,000, our 42 year old male would purchase a single $588,500 policy for $469 per year. If the insurer became insolvent, Assuris guarantees 85% of that benefit which is equivalent to $500,000 of coverage (the actual need). While this may solve the benefit amount problem, you end up paying much more for your insurance. In addition, it may not be possible to over insurer yourself on policies with income based or fixed amount benefits maximums.

Government regulators and Assuris have learned from the insolvencies of the early 1990s and closely monitor Canadian insurers. While it’s not a complete impossibility, I think it’s unlikely that you would lose any portion of your insurance benefit due to an insurer’s insolvency. That said, I still think people need to know the Assuris benefit guarantees.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more before speaking to an insurance agent, The Canadian Bar Insurance Association (CBIA) offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local CBIA insurance sales representative who can assist you with insurance protection questions and needs. For information on Assuris guarantees, you can visit www.assuris.ca.

As a self-employed lawyer, you are directly responsible for your business expenses. So what would happen if a serious accident or illness prevented you from working?

Just because you can’t work doesn’t mean your business expenses suddenly stop. You’ll still owe rent, equipment lease payments, and utilities. In addition, you probably have employees with families who depend on your ability to pay a salary on time. 

You’ll need money to keep the doors open and the lights on so you have something to go back to when you recover. If it looks like you can’t return, you’ll need to cover the costs of shutting down your business. So how do you protect against this problem?

There are many ways to protect against business expenses if you are no longer able to work. Here are a few:

Rely on existing billings until you recover

At any given time you probably have several clients who owe you money. If paid, this income could be used to offset your monthly business expenses while you are disabled. However, a heavy reliance on this strategy comes with significant risks. 

Many disabling illnesses will gradually impact your ability to earn a living over a period of several weeks or months. During this period, your billable hours may dramatically decline, and by the time you are no longer able to work, there could be significantly less unpaid business than you’d expect to see when you were healthy. This may not be enough to carry your business expenses. 

Another concern is that is that once word gets out that you are no longer able to work, clients will drag their feet or even refuse to pay their bills. It’s even worse if you can no longer afford to employ someone to follow-up on outstanding invoices. 

Your accounts receivable can help carry your business expenses, but at best it’s only a temporary and unpredictable solution. 

Rely on partners to cover your expenses

Obviously, this is not a solution if you are in sole practice, but it’s certainly an option if you are in a larger firm where your expenses can be spread over several people. The problem is with small firms where your share of the costs can be very significant. Your partners are probably just as busy as you and asking them to service your clients and cover your share of the expenses could place a heavy burden on them. This would affect their own business and everyone could suffer financially. It may be bearable for them in the short run, but your disability could last for several months or years. There are better solutions.

Rely on personal savings

The money you set aside for you and your family? Don’t even think about it! Unless you are absolutely certain that you will quickly return to work, you risk losing a nest egg forever. Why take that chance?

Close the doors

This is an extreme option that should only be considered if you know you will be disabled for a long time, or will never return to law. If there is any possibility that you will recover, you want to do everything possible to keep your practice viable so you have something to return to when you are better. Can you imagine building your practice from scratch again?

Even if closing the doors is unavoidable, it does not eliminate your obligation to pay significant expenses. This may include taxes, penalties for breaking an office rental agreement or equipment lease and staff severance costs.

Business Expenses Insurance

Business Expenses Insurance is designed to cover your share of the expenses that are normal and customary in the conduct and operation of your office should you become disabled. These expenses may include:

• Rent
• Utilities
• Employee salaries
• Stationery and other office supplies
• Business taxes
• Business equipment

A Business Expenses policy will pay a monthly benefit equal to your eligible expenses, after any incoming revenue is deducted, up to the policy maximum. You may even be able to carry forward the unused portion of the benefit from months when expenses are lower than predicted. In addition, your policy may cover the costs associated with closing your business, such as penalties for breaking a lease. 

It’s important to note that your personal income is not considered an eligible expense under a typical Business Expense policy. You should address this need with a Disability Income policy.

Purchasing Business Expenses Insurance is clearly your best solution for meeting your expenses should you become disabled. It allows you to keep your doors open until you can recover, or help cover the costs of closing your doors. The premiums are normally considered a tax deductible business expense. And while the benefits payable would be considered taxable income, the expenses incurred while you are disabled would be deductible. 

If you want to learn more before speaking to an insurance agent, The Canadian Bar Insurance Association (CBIA) offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local CBIA insurance sales representative who can assist you with your business expense protection questions and needs. 

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. 

It’s my opinion that too many people buy insurance policies that should be avoided. I’m not talking about auto, home, health, life and long-term disability insurance policies. Ignore these at your peril. I’m talking about insurance policies that offer questionable value for most people because they are over-priced or offer unnecessary protection.

Here are five examples of insurance policies that I believe most people should avoid.

Mortgage Life Insurance

Banks love to offer life insurance policies that pay off the mortgage if you kick the bucket. But before you sign up, ask yourself, “Who do I want my money to go to when I die?". Mortgage life insurance takes that decision away from you and your family. The mortgage may be paid off, but what if the best decision upon your death is to do something different with the money?

What you really want is a personally owned Term Life policy. It gives you and your family full control over the proceeds and may be far less expensive to own than mortgage insurance.

Optional Group Life Insurance

Many employee group insurance plans allow you to buy extra life insurance amounts beyond the basic plan maximums. Some plans even allow you buy this coverage without proof of good health. While it’s easy to enroll and could be a real life saver to someone who is uninsurable, here’s the rub: If you are a healthy nonsmoker, a personally owned insurance policy will probably cost significantly less. What's more, should you leave your job; you can't take your group life insurance coverage with you. The personally owned policy is yours to keep.
Explore a personally owned life insurance policy before you sign up for your employer’s optional life insurance.

Accidental Death Insurance

Accidental Death insurance covers you for some, although by no means all, of the gruesome ways you could die accidentally — that is, something other than disease. However, contrary to popular belief, the vast majority of people will die from disease, not accidents. As a result, it’s extremely unlikely that a claim will be paid under an Accidental Death policy.

A regular life insurance policy is always the best choice because it will cover you for both accidents and illnesses.

Insurance for a child under age 18

The main purpose of life insurance is to provide financial protection for your family and loved ones after your passing. Although you can insure the lives of your children, why would you? Some would argue that it guarantees the child will have insurance should their health change and render them uninsurable. That’s possible, but the odds that a healthy child’s insurability will change before they are capable of buying insurance on their own are very low. What’s more likely is that your kids will outlive you.
If you really want to help your kids, use the money you’d spend on a children’s policy and buy insurance where it’s really needed — on your life.

Extended warranties on consumer electronics

Surprised to see this on my list? Extended Warranties on consumer electronics are insurance policies and the worst buy on my list. According to industry experts, the vast majority of defects are discovered during the manufacturer’s warranty period. In addition, electronics are evolving at a pace that renders most items obsolete within a year or two. As a result, most people choose to replace rather than repair.

Electronic retailers encourage their sales people to push extended warranties because they are extremely profitable, not because you really need the protection. Stick to reliable brands and save your money.
Why do people buy these policies?

I believe many risk averse people are misinformed about their real odds of having a claim in relation to other risks, while others are simply unaware that they could qualify for significantly better, less expensive alternatives. However, for many people the answer has to do with what psychologists call framing.

Framing refers to our state of mind in the moment of decision. People tend to reach buying conclusions based on the 'framework' within which a situation was presented to them. For example, a consumer considering a life insurance purchase is reminded of their long drive to the cottage every weekend and the accidents they’ve seen over the years. The worry of being killed in a car crash, however remote the possibility, results in the decision to divert part of the purchase toward an Accidental Death policy. The consumer believes it’s a small price to pay in relation to the perceived risk.

When you buy insurance, you want a balanced portfolio. Let facts and logic drive your decisions and avoid purchases of narrowly focused single-purpose coverage at the expense of better alternatives.
Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative who can assist you with your insurance questions and needs.

Myth #1: I don’t need life insurance because I’m single and have no dependents.

Fact: Everyone leaves behind expenses when they die. In addition to funeral costs, there may be medical bills and personal debts that have to be paid. While your estate could be liquidated to cover some of these costs, it takes time and may not be enough. Life insurance relieves the financial burden of your death on your family or executor by creating instant tax-free cash. 

Myth #2: I have enough life insurance through my employee benefits.

Fact: Most employee life insurance benefits are designed to provide a basic amount of protection that would only be considered adequate for someone with a low income or very modest needs (see next myth below). In addition, employer provided life insurance cannot be considered permanent as the benefit can be reduced or lost if you leave your job. You may also be surprised to know that depending on your age and state of health, a personally owned life insurance policy may end up costing less than your employee benefit options. 

Myth #3: Twice my annual salary is an adequate amount of life insurance.

Fact: There was a time when many insurance experts used a multiple of earnings to determine your recommended life insurance purchase. However, most now agree that the insurance protection needs of most people are too complex to be adequately addressed with a simple income based formula. Addressing the financial risks associated with changing personal debts, rising family income needs and uncertain investment performance requires a detailed analysis before an insurance amount can be recommended. As a result, using a multiple of earnings as a life insurance amount is too imprecise. 

Myth #4: All life insurance is the same, so you should always buy the cheapest policy.

Fact: While all life insurance is designed to pay a benefit at death, there are many different policy choices and options. Depending on your needs, the cheapest route may not be your best solution. Don’t use price as your final decision factor until you have a complete understanding of your financial protection needs and the pros and cons of each policy choice option. Once it comes down to cost, don’t jump at the cheapest initial price. Focus on the total life-time cost of owning your policy and the reputation of the company that backs it. 

Myth #5: I won’t need life insurance once my children are grown and my mortgage is paid off.

Fact: How would your spouse manage daily living expenses if you were suddenly gone? What if your spouse outlived you by 10 or 20 years? Life insurance is a great strategy for creating a lifetime income for your spouse. If your spouse’s income is not an issue, your policy proceeds can be used as a tax-free gift for your children, grandchildren or favorite charity. 

Myth #6: It’s a big inconvenience to buy life insurance!

Fact: It’s a fact that any purchase as important as life insurance requires a modest investment of your time, but it does not have to be a major inconvenience. A skilled insurance agent who has experience working with busy legal professionals will respect the value of your time and work as efficiently as possible to get your policy issued. 

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative who can assist you with your insurance questions and needs. 

Nothing marks the beginning of the year like RRSP season and a plethora of mutual fund ads boasting performance with imagery that suggests you could be sailing a fancy yacht as a youthful retiree. 

Don’t get me wrong, the possibility of excellent investment performance and becoming the captain of your own expensive yacht sounds great, but many of these ads overlook the significance of the fees associated with mutual fund investments. It suggests to me that companies that don’t emphasize the competitiveness of their fees have something to hide.

You may have heard a few years ago that a study by Harvard University concluded Canadians consistently pay the highest fees for mutual funds of any industrialized country. We typically pay as much as 60% more than in the US and 200% more than in Europe. Another recent study (commissioned by a large mutual fund manager) concluded that the Harvard study was flawed and that Canadians pay fees that are much closer to our neighbors to the south. Whatever you believe, it’s still extremely important to understand the fees you pay and how they impact your overall returns. 

What you pay in fees can be confusing unless you understand some of the mutual fund industry lingo and what goes into the fee calculation. Take “management fees” and “management expense ratios”. These are terms that many people interchange, but they are definitely not the same. Management fees represent an amount taken from every invested dollar as payment to a fund manager for selecting the investments in the mutual fund. However, this is only one component of the overall fees you are charged. The fee you should really be interested in is the Management Expense Ratio or MER.

The MER includes the management fees plus other costs such as administration charges, legal, audit, marketing expenses and GST. The MER can also include sales commissions, both upfront and annually, that are paid to the financial advisor who sells you the funds. 

If the Harvard study I mentioned earlier is indeed accurate (and I believe it is), Canada’s average fund MER was 2.56%, versus 1.11% for the US. So, if a mutual fund had an annual rate of return of 5.44%, this means that the investments actually yielded a return of 8%, but then expenses of 2.56% were subtracted.

Reducing your fees can have a huge impact over time. Don’t believe me? Please consider the following example:

Imagine opening two RRSP investment funds and depositing a lump sum of $50,000 into each. The only difference between them is that one fund includes an investment fee of 2%, while the other offers a 1% fee. If both have an 8% annualized rate of return, by the end of 30 years, the fund with a 1% investment fee would be nearly $100,000 larger than the more expensive, but equally performing fund choice. That’s about the cost of that yacht in the ads, but it’s owned by the people that sold the more expensive investment, not you!

What to do? Start by understanding the total fees you pay on your current investments and shop around. When comparison shopping, the main number that you will need to compare is the average rate of return after all expenses are deducted. MER information on a mutual fund can be found in the prospectus or on websites like globefund.com and morningstar.ca.

Also ensure that you are comparing apples to apples. Management expense ratios are typically highest for the specialty stock mutual funds and lowest for money market funds. Bond and balanced fund fall somewhere in the middle. Never try to compare the cost of one fund to another if the underlying investments are from different asset classes. Also keep in mind that the fees are typically lower from direct retailers and through large group plans.

My advice is not intended to replace that of a qualified investment expert who has reviewed your specific needs. If you are looking for more information on investment fees, CBA Financial offers lawyers excellent information on its website at www.barfinancial.com.

According to actuarial tables, a 35 year old has a 50% probability of being disabled for at least 90 days and the average duration of disability is an incredible 3.5 years. The probability decreases slightly as you get older, but the average duration increases. The probability of a 50 year old being disabled for at least 90 days is 33%, but the average duration is almost 5 years. 

Based on the probability of having a claim, I think you’ll agree that disability insurance is a good idea, but if you believe your employee Long Term Disability (LTD) plan offers plenty of protection, please read on. 

Here are a few things you should know about employee LTD plans

The overall benefit maximum may be less than you need

If your annual income is $250,000, you should be entitled to approximately $9,000 of monthly disability benefits tax-free. A $400,000 income would qualify you for a monthly tax-free benefit of approximately $12,000. Unfortunately, many employer LTD benefit plans don’t offer maximums that come close to covering these higher incomes. 

“Own Occupation” definitions in LTD contracts are NOT the same as individually owned policies

The core of any disability contract is what defines your eligibility for a benefit. Most LTD contracts will state that you are only considered disabled if “you are unable to perform the essential duties of your Own Occupation” and not working elsewhere. This typically switches to “Any Occupation for which you are reasonably qualified for by training or experience” after 2 or 5 years on claim. 

Unlike LTD, individually owned Disability Insurance (DI) policies with an Own Occupation rider will not change definitions for the duration of the claim (to age 65). In addition, the benefit can be very specific to your type of practice. 

A litigator that suffers from severe anxiety attacks while appearing in a court room is prevented from working in his Own Occupation. Disability payments would still be made even if this lawyer is able to work in a different area of law or in a completely different occupation as long as he remains disabled for his Own Occupation as a litigator. 

Unfortunately, most LTD contracts would not consider this lawyer disabled under their Own Occupation definition unless he was unable to perform his job as a lawyer and not working elsewhere. 

Your LTD may not provide benefits if you can work part-time or full-time, but at a reduced income.

If you are able to return to work on a part-time or even full-time basis, but your disability prevents you from earning a significantly portion of pre-disability income, you may have a Partial or Residual claim. While these claims are covered by most DI policies for professionals, they are not typically covered by standard LTD contracts.

A Partial Disability benefit provides coverage to someone that suffers a total disability, but is then able to work in a reduced capacity. Typically, benefits are payable if the individual has a loss of earning capacity exceeding 15- 20% due to their disability. 

A residual disability benefit provides a monthly benefit in proportion to lost income. This recognizes the fact that returning to work may be gradual and you may require an income supplement while you get back on your feet. 

Other differences

I will attempt to address other differences between LTD and DI in a future blog. In the meantime, here’s a list of items I hope to cover:

• The All Source maximum: the maximum your LTD benefit will allow you to collect while on claim when all other sources of income are considered
• Benefit offsets: other sources of income that directly or indirectly reduce your LTD benefit
• Lack of LTD contractual Guarantees
• Loss of LTD benefit if you leave your employer
• When LTD benefits are taxable
• LTD and a lack of protection against inflation

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more before speaking to an insurance agent, the Canadian Bar Insurance Association offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com.

While you were signing the paperwork for your mortgage, did a bank employee ask you to consider purchasing mortgage insurance protection? You were probably told “…it will pay your mortgage if you die…just a few medical questions… it’s inexpensive…”. While that person may have had the best of intentions, he or she probably lacked the training needed to make you aware of important contractual details and how these compare with other insurance protection options. 

Here are 3 important things you should know about most mortgage insurance policies: 

1. You do not control the benefit

In the event of your death the proceeds of your insurance is automatically used to pay off your mortgage. Becoming mortgage-free may be a desirable result, but what if there is an unforeseen need for extra money after you die? Perhaps your home needs major renovations or a child’s university costs need to be paid. With control of the life insurance proceeds, your spouse could pay off all or a portion of the mortgage and use the remaining money to cover other expenses. Another possibility is that it could make more financial sense to invest the money rather than immediately pay off the loan if your mortgage is locked into a very low interest rate. 

Mortgage insurance can only be used to pay off a mortgage. A personally owned life insurance policy offers your family the freedom to decide how to use the proceeds. 

2. You could lose your insurance protection 

Mortgage insurance is only in effect for as long as your current mortgage contract. If you decide to renegotiate your mortgage (maybe you want to finance a large renovation) or move to a new lender, you may have to apply for new mortgage insurance coverage. If you have had a change in health, you may be unable to qualify. This leaves you in the position of either losing your insurance or being forced to accept an undesirable financial arrangement with your current lender. 

With a personally owned life insurance policy, your coverage is unaffected by any changes you make to your mortgage or lender. In addition, you are never at risk of losing your current insurance because of a change in your health. 

3. Cost

You may be surprised to learn that a typical mortgage insurance policy can be significantly more expensive than a comparable amount of personally owned life insurance.

To illustrate this difference, take an example of a male non-smoker, age 31, with a $250,000 mortgage. The average monthly premium for 10 years for life insurance from the Canadian Bar Insurance Association (CBIA) would be just over $23 per month. A major bank’s mortgage insurance for the same amount would cost just over $32 per month (40% more). In addition, at the end of 10 years the CBIA coverage would still be $250,000, while the mortgage insurance policy would have reduced by over $50,000 to reflect the current outstanding mortgage. 

Are there any advantages to mortgage insurance?

For some people, the convenience and speed of issue of buying a lender’s mortgage insurance outweighs the contractual advantages and cost savings of buying elsewhere. Some may also be attracted to the minimal underwriting requirements typical of these polices. If that’s you, I suggest you read this CBC Market Place article “Mortgage insurance, not always a sure thing”.

Remember, if you are healthy, you have the freedom to make your own life insurance choices. Always compare your options before you buy. You may be very surprised by what you’ll learn.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, the CBIA offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative who can assist you with your insurance questions and needs. 

Economic Death occurs when a prolonged disability prevents you from earning a living and you have no other source of income. You are still alive, but have been become a financial burden on your family, friends and society. This can have a profound impact on you and your family’s future and for some it’s a fate worse than death. 

Think the risk is low? You may be surprised to learn that during your working years, the odds of suffering a disability are much greater than the odds of dying prematurely. According to actuarial tables, between ages 35 to 65, 3 out of 10 people will become disabled for at least 90 days. Of those disabled, the average duration is 2 years and 1 in 7 will be disabled for more than 5 years. Think about how different your life would be without an income for 5 years or longer.

You are probably asking yourself “if so many people suffer from disabling conditions, why don’t I see or hear much about it?” The reality is that most disabilities are the result of invisible conditions such as heart disease, cancer, psychiatric disorders and addictions. In addition, many lawyers hide their disabilities out of fear that it will negatively impact their peer and client relationships. Only those closest to a disabled lawyer know the real reason for the “long-term sabbatical”, “early retirement” or “leaving the partnership to start a new career”. 

A disabling accident or illness can strike even if you believe you are in good health. In fact, the stresses of being a legal professional may put you at a much higher risk for certain illnesses than the average professional. Of lawyers who claim under their Canadian Bar Insurance Association (CBIA) disability benefit each year, more than 40% are the result of a mental or nervous system illness such as depression, addiction and other neurological disorders. With other professional groups, the rate is almost half this amount.

The most cost effective way to avoid an Economic Death is by purchasing a disability income insurance policy designed specifically for your needs as a lawyer. These insurance policies will replace your lost income with a monthly benefit should you no longer be able to practice law. Although these policies normally cost more to own than a life insurance policy, it reflects the increased possibility of you making a claim and the potentially larger benefit payment. 

If you’ve ignored or avoided your disability insurance needs because you think you can rely on other sources of income, please consider the following: 

Savings: If you saved 5% of your income each year, a disability that lasts for 6 months could wipe out 10 years of savings.

RRSP Withdrawals: Not only are there tax consequences and penalties when you withdraw from your RRSP, your long term retirement plans may be seriously jeopardized.

Borrow from the Bank: It’s extremely unlikely that a bank will be interested in loaning money to a person without a source of income.

Borrow from Family Members: Your family has its own financial needs, obligations and goals. These don’t include the financial burden of loans that may never be repaid by an unlucky relative. 

Working Spouse: Can one person really be expected to be the parent, your private nurse and breadwinner all at once? What if your household depends on two incomes? Is it realistic to believe your spouse can easily find a new job to make up the difference?

Liquidation of Assets: You could sell assets, but what are you left with should you recover? Do you really believe people will offer you a fair market price if they know you have been forced to sell? 

Government Benefits: Canada Pension Plan pays an amount based on how long and how much you have contributed. To qualify before retirement, you must prove that you have an extremely serious disability that will likely lead to death. If you do qualify, the maximum benefit for 2010 is only $1126.76 per month and subject to taxation. Government benefits like CPP and welfare are intended to provide those most in need with a subsistent income.

Given the odds and risk to you and your family, I believe disability insurance is the most important insurance purchase of your life. Even if you already own disability insurance on your own or through an employer, make sure you have it reviewed regularly by a disability insurance expert to ensure there are no gaps in your protection and that your benefit has kept pace with your income needs. 

If you want to learn more, before speaking to an insurance agent, the Canadian Bar Insurance Association (CBIA) offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com. You can also find your local insurance sales representative that can assist you with your disability insurance questions and needs. 

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. 

I recently met a new neighbour who told me he was the corporate counsel for a large company. When I explained my insurance connection to the legal profession, he quickly responded with “I have all the insurance I need through my benefits at work."

Before he could turn and run, I assured him I would not preach the virtues of buying insurance (unless he wanted to listen), but let him know I thought it was extremely important to have his coverage reviewed by an insurance expert to ensure he is adequately protected. In my experience, most people who rely on their employer for the majority of their insurance do so because they’ve never taken the time to understand the significant shortcomings typical of this type of insurance product. 

Here are 5 things I think everyone should know about employee insurance benefits:

1. Coverage limits are well below the actual needs of most lawyers. 

   Although the dollar maximums of a typical employee group Life or Long Term Disability insurance plan may sound generous, in most situations these limits are far better suited to the needs of lower income employees, not those of a lawyer. 

2. Significantly restricted contractual benefits when compared to individually owned policies for lawyers.

   Except for very small employers, most insurers will offer insurance to all active employees even if their state of health would otherwise prevent them from owning insurance. To offset this claims risk, insurers impose contractual restrictions to significantly reduce or eliminate certain claims. This is particularly true of most employee Long Term Disability insurance benefits. Most personally owned, medically-underwritten policies will offer far more generous benefits to lawyers.

3. Limited flexibility to address your unique needs.

   It’s very unlikely that your insurance needs are exactly the same as everyone else in your company. However, the “one size fits all” design of most employee benefit plans means you share the same level of coverage as everyone with a similar position to yours. 

4. You could lose most or all of your insurance if you leave your job.

   Most employee insurance benefits cannot be taken when you leave your job. If you have a health issue, you could be prevented from owning the same level of coverage you once had, or worse yet, you could be left with no insurance at all. While you may be able to find a new employer that can offer you similar benefits without proof of good health, it most certainly limits your employment options. What if you wanted to go into sole practice? Owning your own insurance takes part of the worry out of future changes to your health that could restrict your freedom to make personal career choices. 

5. You don’t control your coverage. 

   Unless you are responsible for the employee benefit decisions at your firm, you have no control over the design and cost of your insurance benefits. Decisions to reduce or even cancel the insurance plan can be made without the consent of employees not currently on claim.

   Even if you are involved in your firm’s plan decisions, poor claims history can result in an insurer’s need to significantly increase rates or a refusal to renew the contract.

I am not against the idea of owning insurance benefits through an employer. I have worked with thousands of employee group plans over the years and this insurance can offer adequate protection for many people. However, those that benefit most from this coverage typically have modest insurance needs, lower incomes, or could not otherwise obtain insurance due to health issues. For a healthy lawyer with a good income, relying heavily on a typical employer insurance plan is not a necessity or an ideal financial protection strategy.

I strongly recommend that most lawyers consider supplementing their employer provided benefits with personally owned insurance. While it does require initial proof of good health, a well designed individually owned policy is contractually superior in nearly every way to an employer provided plan and may even be less expensive to own.

Please note that my advice is not intended to replace that of a qualified insurance expert who has personally reviewed your specific benefits and insurance needs. If you want to learn more, before speaking to an insurance agent, the Canadian Bar Insurance Association offers excellent insurance education articles and planning tools for lawyers at www.barinsurance.com.