Taking Financial Ownership

5 things to be cautious of when purchasing insurance

by Lauren Arnold, Planswell

Insurance has a bad reputation for a good reason. While you’re told insurance is about protecting you and your family, it’s almost always sold by agents who work on commission. This means they get paid based on how much they sell you – whether or not it’s the right plan for you.

That said, insurance is also an essential part of a strong financial plan and can make or break your financial future. Don’t sweat it, though. Not all insurance is bad – it’s just something you have to be cautious of and make informed decisions about. We’re here to help. Here are five things to avoid falling victim to when purchasing insurance:

1. Not reading the fine print

While it’s always important to believe the best in people, when you’re dealing with your finances you have to look out for yourself first. This starts with reading the fine print before you purchase. All of it. An example of fine print mattering when deciding between one insurance policy over another is with critical illness coverage. To put it simply: you have to know which critical illnesses are actually covered. Not all policies of the same name have the same fine print. For example, certain policies only cover four illnesses compared to others that cover over twenty.

While you’re doing due diligence throughout the insurance purchase journey, don’t forget to research what is covered by your province’s healthcare system. Unfortunately, even in Canada, a surprising amount is often left on the patient to cover. But if it is covered by the province, don’t pay twice.

Overall, make sure you’re informed about what your coverage actually covers. This ensures you won’t be wishing you did more or feeling like you are overpaying every month.

2. Purchasing more than you need

Life is complicated – we all know that. Throughout your life you will experience times when you need more protection and there will be times when you need less protection. Needing more or less coverage is usually about your dependents, the people that rely on you financially. For example, when you go from being single to having a spouse and/or having children, those people may become dependents. There’s always more at stake if you are unable to earn an income when other people depend on your salary.

That being said, there are many times where you don’t need certain types of insurance. For example, when you’re in the first few years of your career and you don’t have dependents, life insurance often wouldn’t be needed.

Because insurance is often sold by salespeople who receive a commission, they are incentivized to recommend more coverage than you need. Be sure to always get an unbiased opinion from either a fee-for-service planner or from Planswell (we pay salaries, not commissions, to our Plan Pros) so you can make the right decision for you.

3. Buying insurance as a part of your investment strategy

There are a number of insurance products out there that are sold as investments. Often, they go by names like whole life insurance, universal life insurance, and segregated funds (which look similar to mutual funds with an additional insurance component).

It’s not unusual for an advisor to suggest purchasing insurance as an investment strategy. Here’s the problem: the fees and commissions (that are often not explained properly to the client) charged by the salesperson in these situations typically far outshine the returns.

In most situations, it makes sense to buy low-cost insurance and low-cost investments.

4. Not purchasing a specific amount of insurance

This is not to be confused with not over-purchasing insurance. When we talk about purchasing a specific amount we’re referring to pricing the insurance amount that is covered in your policy – which is rather complicated. If you do some quick Google searching, you’ll find that life insurance is often sold in large, round ‘banded’ numbers like $500,000 or $1,000,000.

This is due to two reasons, the first being that calculating a more precise amount requires a lot of in-depth calculations that most people can’t be bothered doing. The second reason is that rounding up is a fast and easy way to make more commission.

The precise amount of insurance you are purchasing should always be tied to a deep understanding of what is going on in each part of your financial life.

5. Waiting until something happens

Unfortunately, this mistake happens all too often. Insurance is something you buy when you’re healthy. It’s purchased as a precaution in case you were to ever get sick or were unable to work in the future.

Once you are diagnosed with a health condition, things get a lot more complicated when it comes to getting your insurance in place. Sure, there are alternative insurance providers that can support those with pre-existing conditions or a more extensive health history, but with that comes higher costs. It will always be more affordable and easier to purchase insurance before unexpected health concerns or events pop up.

It’s extremely important that protecting yourself starts with making an informed decision about every financial move you make in your life. Do your research, get second (and third) opinions, and understand what you’re doing when it comes to making insurance decisions.

Understanding what and why you’re doing certain things when it comes to your finances all begins with having a financial plan that looks at every part of your financial life – investments, insurance, and mortgage needs. So go ahead, spend the next few minutes building yours today and get a clear idea of everything you need to do to reach your financial goals.

Grow your wealth. Manage your borrowing. Protect your assets. Planswell gives you a free plan that ties investments, insurance and mortgages together so you can maintain your lifestyle throughout work and retirement.

The views and opinions expressed in this column are those of the contributor and do not necessarily reflect those of Equitable Bank. Any information provided is for information purposes only and Equitable Bank makes no representations as to the validity, accuracy, completeness or suitability of any content. You should seek the advice of a qualified professional or undertake your own research before making financial decisions.

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