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Ask Yourself These Two Questions before Buying Insurance

2-Guiding-Principles-when-buying-any-insuranceWe're all bombarded with insurance on everything that we buy, everything that we do and even on our own lives. If you went through your bank statement and added up all the premiums you pay every month for insurance you'd be surprised at how much insurance costs you. Is it all really worth it?


I think most Canadians spend far too much money on their insurance. That's all their insurance combined. You can buy insurance on just about anything, like your big-screen TV, cars, motorbikes, boats, your house, your income, your health and even your life. But next time somebody offers you insurance and need you to ask yourself two simple questions; 1) what is the likelihood of the event occurring, and 2) what is the financial impact to you and your family.

What is the Likelihood?

If somebody is selling your insurance on a $1,000 big-screen TV and a three-year warranty would cost an additional $300 that's a 30% premium to protect your investment in a television. So let's apply our test. What is the likelihood of the TV will break within three years? Probably fairly high. There is a pretty good chance that a complex electronic device like a large flatscreen TV could have a defect or get damaged in the next three years.

What is the Financial Impact?

Now, what is the financial impact to you or your family? The maximum you'll be out for the TV is $1,000. In reality the price for that TV will probably go down over the next three years so you'll only be out $700 or $800. In this case the financial impact to the family is very limited and the cost of the insurance is very high. This is not the type of insurance to buy.

Apply the test personal insurance products

What about your income? What if you got injured or sick and could not go to work and your income stopped? Again, let's apply the same test. What is the likelihood of becoming disabled over your working career? Actually it's very high. There is about a 45% chance that every worker in Canada will experience at least one period of long-term disability in his/her lifetime. And if your disability lasts more than 90 days the average time off work is 2.9 years. So, our first test shows a high likelihood of the event occurring. Let's look at the impact. If you were off work for three months, six months, a year or longer would you be able to pay your bills? Would you be able to pay your mortgage, put food on the table, pay for utilities and just maintain your lifestyle? For most Canadians with no disability income protection insurance this would be impossible. The financial impact would be huge. Families could lose their home, their retirement savings, and possibly even go bankrupt. So our second test, financial impact, shows there is a lot to lose if the event occurred. Therefore, ensuring your income with proper disability insurance makes a lot of sense and this is a type of insurance to buy.


Life Insurance also another expensive insurance product. If we apply the same test we have the following results: likelihood – there is about a 10% chance a Canadian would have a premature death before the age of 65; financial impact – the costs associated with premature death plus the permanent loss of all future financial contributions of an income earner or parent can be devastating to a family. Even though the chances of death are much lower than disability the financial impact is far greater. So when weighing up if you should have life insurance, this too is a must-have type of insurance policy.


There are some things we’re forced to have insurance on. He can't drive a car without it being insured. You can't get a mortgage from the bank without your property being insured. This makes sense because the government and the bank knows the financial impact and the chances of it happening are both high, and therefore they want insurance to protect the public or the loan they have given you.  But no one is forcing you to ensure your life, to protect your loved ones, or ensure your income to guarantee your lifestyle. These insurances are optional and you have the choice, either insure the risk and have somebody else pay if you get sick, hurt or die prematurely; or take the risk on yourself and pay out-of-pocket and face the financial consequences should any of these events happened to you.