Having the right insurance coverage is one the most important aspects of financial planning. But most Canadians are under insured. This is partially due to the fact that insurance can be complicated. So it can be difficult just knowing where to start. This week I invited Lorne Marr of HUB Financial on to the show to give us a better understanding of how life insurance works and share some of the many factors that can affect insurance rates. With over 25 years of experience in the life insurance industry, Lorne knows a thing or two about the subject.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Do you prefer to invest in companies that are socially responsible? If so, or sponsor Wealthsimple will help you build a portfolio that focuses on low-carbon, clean tech, human rights, and the environment. Get started with socially responsible investing by visiting maplemoney.com/wealthsimple. Now, let’s chat with Lorne…

Tom: Hi Lorne, welcome to the Maple Money Show.

Lorne: Thanks for having me.

Tom: I don’t know a lot about is life insurance. From personal experience, at one point I had more expensive life insurance because my blood pressure was a little high. I got that down and got new life insurance. But basically, I ignored the old one and canceled it eventually. We just started with new life insurance, new testing and all that and got a much better rate. But beyond that, I don’t know a lot about life insurance. It’s just something I got because I had to get it. But it was without knowing a lot of the intricacies about it. But just off that personal experience, one thing I can see is that being healthy really does help the rates. What I want to talk to you about today is just running through all the different ideas about how people can lower their rates, what they need to look out for and what they need to look out for if can’t avoid genetic issues and things like that. At least they can be aware of it and know how that’s going to work for them when they go to get life insurance. If we could just start with the basics, maybe first? What are some of the more obvious things? What are some of the roadblocks you see people hit when they’re trying to get life insurance?

Lorne: One of the roadblocks would be that they’re finding the right amount. I don’t know if that’s a roadblock, but that’s really the first step; determining how much life insurance you need. That will let you know how much you need and determine which type of plan fits your budget. That’s the first thing, understanding how much you need and then figuring out which one fits best within your budget. In terms of the roadblocks, are you referring to how they would get approved? Or how to plan the best deal once they know that?

Tom: First of all, I just want to say one thing. You mentioned the amount of insurance. I should have said that too. I actually doubled my insurance when I went for the new insurance because originally, I thought I’d just do my mortgage in about a year of income. And then talking to someone else, they said, “Are you actually okay with that? A year later, if something happens to you, is your family going to be okay when there’s no money left?” I also realized that mistake, too, that I did not have enough insurance. Maybe we can just stick on this topic for a second, actually, since you brought it up. What is the proper amount of life insurance for someone?

Lorne: There’s rules of thumb that could be anywhere from five to 10 times your annual income, depending on how old you kids are. But if your kids are younger, you’re probably going to need more insurance than if your kids are older because there’s a longer window when people are dependent on your income. But those are really just rules of thumb. You need to go through a “needs analysis” to know how much you need. Someone can walk you through that on a website. There’s a lot on our website and there are a lot of websites that have “needs analysis” calculators. Or a broker can walk you through it and help you determine how much you need. You would be looking at things like your mortgage, any outstanding lines of credit, if you want a certain amount of money set aside for your child’s education. Once those things are covered, what percentage of your income would you want replaced? Then you take those immediate needs, the income replacement needs and you minus them from your liquid assets that you have in place. Then you see what the shortfall is (if there is a shortfall) and that’s really your insurance needs. That’s a very high-level on how you’d figure it out. There are also lot of online tools, including the one on our site that helps you with that. Or better yet, a broker or an adviser can help you figure out how much you need.

Tom: Back to the roadblock thing. I was thinking about when you’re say looking online and filling in all these fields. It’s the scary questions that come up like, “Do you smoke? What’s your weight?” It’s just all these different things that I assume factor in and probably end up costing you more in the long run.

Lorne: Yeah, for sure. Smoking’s a no brainer in terms of lowering your rates. Rates on a term policy for a younger person can be more than double for a smoker versus as a nonsmoker. That’s a huge one right off the bat. Insurance companies define smoking as any tobacco use, nicotine, nicotine substitutes within the last 12 months. Even if you’re a casual smoker, if you want to lower your insurance premiums, that’s your best bang for your buck. Definitely, right off the start is to quit smoking. That’s going to really save you a lot of money.

Tom: What about drinking? I assume that’s probably more leeway than that, but there must be a limit.

Lorne: With drinking, there could be a few issues that impact your rate. If you have a beer every couple of days it’s probably not going to impact your rates, except it might impact your health. if you have a beer once a month, obviously, that’s not going to impact your health much or your premiums at all. Now, if you have a beer every day, it probably won’t directly raise your rates very much. Let’s say it’s four beers a week. It won’t directly raise your rates but four beers a week could make you heavier which could impact your rates. Somebody who has high blood pressure and has four beers a week may cause them to gain weight and increase their blood pressure which likely would cause them to pay a higher premium. If you have a combination of four beers a week, you’re 40 pounds overweight and you have high blood pressure—that’s not a great picture for the insurance company. You’d still be able to get insurance for sure. And that’s actually what we specialize in, the hard-to-insure market. But you wouldn’t be able to get it at the same rate as someone who has no health issues.

Tom: You’ve described me perfectly. There was a point where I’d often sit down to do various blogging tasks and I’d have a beer. I was also gaining weight. I did have blood pressure issues. But I basically fixed all of that when I went for my new insurance. Despite my limited knowledge about life insurance. Personally, I’ve seen both sides of that, where insurance that was double the amount pretty much cost the same as what I was paying for the previous insurance. But just by getting healthier and changing nothing in my premiums, I ended up with twice the insurance coverage. So I’ve definitely seen the difference from myself. I just mentioned weight. How does weight factor in? There are probably certain cut off limits, right?

Lorne: Weight definitely can be a variable. This is a point where it is good to work with a broker, especially if you are obese. There are different ways to define obese but if you’re overweight to the point where it’s going to be an issue for the insurance company, you’re going to want to work with broker. For example, one company may say someone who is six feet tall and weighs 260 might say that’s okay for standard rates. But another company may not. Each company has its own underwriting protocol. So you want to work with a broker is familiar with the different underwriting protocols. And you can’t get that from a website. You do have to speak with someone on that because those protocols could be changing all the time. Manulife might have one protocol this year and they may have a different protocol next year. So weight definitely plays a variable and it plays a variable also when it’s combined with other issues. It usually is combined with other issues. If we go back to that person that’s six feet tall and 260 pounds, if that’s their only thing, they might be able to squeeze into standard rates. But if you combine that with high blood pressure, cholesterol or diabetes, then it’s a different ballgame. You have to look at other options. There’s simplified issue options where they have more limited questions, but you’re paying a higher premium. There are other solutions.

Tom: Two things I’m thinking from what you said… First of all, I love that you mentioned brokers. I’ve seen that with home insurance as well. I assume probably also auto insurance. You can’t just take someone’s recommendation. Even though they say their company is cheaper, it really depends on your own situation. With home insurance I’ve seen one insurance company say they needed something covered on a separate rider while another company included that amount of coverage. It really depends on people’s individual situations. I assume that’s what you mean with life insurance?

Lorne: Yes.

Tom: Yeah, you can’t just get that recommendation from a friend who tells you which one is the cheapest because you don’t have the same lifestyle or factors. The other thing—where you mentioned simplified issue, is that a concern when it comes time to claim the insurance? Similar to not lying on your insurance form, if it’s insurance that you’re not giving enough information on, is that a problem later on when it actually comes time to make that claim?

Lorne: That’s a good question. It shouldn’t be an issue because it’s the same situation as when we do the medical. With the medical, they’re doing the tests to check things but they’re also asking you a series of health questions. Simple issue is getting a sense of all that’s happening. They’re removing the medical tests and asking a shorter series of questions. Now, they’re doing their own thought process on that too. They’re doing that because they’re usually going to offer smaller base amounts. So they’re going to be a less of a risk. And they’re also going to charge a higher premium. How simplified issue works is—once again, there are no medical tests with the simplified issue plan. There are anywhere from maybe three to 30 questions. The more questions you can answer “no” to, the better the premium. As long as you’re answering the questions correctly, your plan is going to be paid because that was the information they were asking at the time. Some simplified issue plans that only 10 questions, there may not be a question about diabetes. There’s nothing to tell them about diabetes in that instance, because there’s no question so it wouldn’t impact it. And, once again, to go back to the broker is you want a broker who’s familiar with that market because he or she can tell you which plan is going to be best based on your health issue. Some companies may have a question on the simplified issue plan that is on diabetes. Others won’t. And if you’re an insulin diabetic, you want to pick the one where you can answer “no” to as many questions as possible—assuming you’re going to go for a simplified issue plan and not a fully underwritten plan.

Tom: So, if you go with the simplified issue plan, it would basically be because you have some other problem you don’t wanted to get tested for?

Lorne: Someone would want to get a simplified issue for two reasons. The best reason in my mind is you are either unable to get life insurance through a traditional channel or the rating you would get—the extra premium you would get is going to be higher than the premium charged on the simplified issue plan. For example, if some had cancer three years ago, the type of cancer is going to disqualify them from getting a fully underwritten plan or the rating would be so substantial that a simplified issue is going to be a lower cost. That’s the first scenario where a simplified issue is going to make sense. The cancer question may be, “Have you had cancer or been treated for cancer in the last two years?” and you may have had it about three 1/2 years ago or were being treated three 1/2 years ago in which case you could answer, no. And you may qualify for a lower rate on the simplified issue than on a rated policy. So that’s the first reason. The second reason is convenience. Some people just don’t want to do medical tests. They don’t like the idea of a nurse doing a blood test if that’s required or just meeting with a nurse. They just don’t want the hassle. So to me, that makes less sense because meeting with a nurse takes half an hour, 45 minutes or even an hour. If you’re going to meet with someone for an hour and can save 20 percent on your life insurance over 20 years, that hour you save can end up costing a lot of money.

Tom: Yes, exactly. Speaking of meeting with the nurse, on my most recent time getting life insurance, she came back a second time. The reason she came back a second time was, even though I knew my blood pressure was much better, it did not show that the first time. They said it was likely a white-coat syndrome or something like that?

Lorne: Oh, that happens at doctors or nurses. There are a lot of tips—and that’s not my main area—I just know it from doing this a long time. There are tips on how to make sure your paramedical test does better. You should be relaxed. You don’t want to exercise right before you meet with the nurse because your blood pressure is probably going to show up higher. An interesting one that I see a lot is the cuff size. So if you’re a big, big guy or gal or even a muscular guy or muscular lady, you want to tell the para-med company or the nurse that’s coming out to make sure they bring an extra-large cuff because you could be in pretty good shape, but if the cuff is too small, your blood pressure may show up higher.

Tom: So it’s already literally adding pressure to it?

Lorne: Yeah, it’s adding pressure. I don’t know the exact mechanics of it because it’s not my area but I’ve heard that over 27 years doing this.

Tom: In my case, the problem was I was at home with my kids alone and there was some toddler-related drama at the time. Immediately after that they wanted me to do a blood pressure test.

Lorne: You had a lousy day could do it too. Or you were in an argument with someone coming home? There could be a lot of blood pressure increasing issues.

Tom: Literally the second time I did it, I was like the state of Zen. We did it just after I woke up and was as calm as possible. The final regular issue I can think of that I wanted to ask you about is, age. I assume as you get older, it’s going to be more expensive. But when you start having insurance aren’t you sort of locked in at a certain point with your insurance?

Lorne: Well, age is definitely a variable. There’s two types of insurance. There is term and permanent. Term is where you can lock in your rate—some for 10 years all the way to way to 100. But 100 is a permanent policy, essentially. Let’s say you can lock it in from 10 years to 40 years. With permanent, you’re looking it in for life. But age is definitely a variable. Age, gender, smoking status are three right off the bat that are impacting your rates. It’s more expensive for an older person than a younger person. All things being equal, it’s more expensive for a male than a female. And it’s more expensive for a smoker than a nonsmoker.

Tom: Speaking of locking in these rates with term, if you’re not taking these high risks and everything and suddenly you have a midlife crisis and want to start jumping out of airplanes, you don’t have to update anything, right?

Lorne: Yes. It’s based on your information at the time. If you applied in good health, with no issues and (knock on wood) become diabetic, you don’t have to tell the insurance company. You’re a diabetic now but you weren’t at the time of application. The information is based on your health and lifestyle at the time that you applied.

Tom: Is there an advantage then to doing this when you’re younger? Maybe there’s a certain point when you’re so much younger that they start baking that into the cake a little knowing you’re going to be much healthier right now?

Lorne: Well, the best time to buy insurance is when you’re younger and healthier, for sure because you know you’re going to qualify at a lower rate. But insurance is also based on your needs. Even if you take out a policy when you’re younger, you might only be making $40,000 or $50,000 a year. And you might be making $200,000 years later. Someone who makes $200,000 a year generally moves in to move into a bigger house. They might send their kids to private school… They add more costs which means there’s more income that needs to be replaced if they want to maintain their current lifestyle.

Tom: With life insurance, is it just truly about insuring that loss? Or should you keep it? Say you have a 20-year term, would you cancel it once you feel financially stable? Let’s say you have no debt and retirement savings. Would you cancel or just keep it?

Lorne: Everyone’s different on that point of view. I’m a big believer in permanent life insurance. I consider it an asset. I know a lot of wealthy people that have life insurance and there are a couple of reasons why you’d want it. It might be you no longer have that need you had when you were younger. My kids, for example, one is in high school but I’ve got two in university so I don’t have the same needs as someone who’s got small kids. But I still kept all my permanent life insurance. The reason I kept it is for two reasons. One, it can be an excellent estate planning vehicle. If you have a cottage, a business, something where it’s going to trigger a gain, permanent life insurance can be paid out tax-free to offset that gain. The other thing is it’s an asset. If you have a million dollars of permanent life insurance, it’s essentially a risk-free asset. You can’t really compare it to an equity investment. It has to be compared, essentially, to an interest-bearing investment. If you want a certain part of your portfolio—maybe this is you’re your area, Tom. Although I am a CFP, I’m not a practicing CFP. I consider it part of your overall assets. I wouldn’t consider it part of your equity assets because if you have a million dollars of permanent life insurance guarantee, you know that million dollars is going to be paid out at some point in the future. But it’s essentially similar to a GIC or some type of fixed income instrument versus an equity fund or a dividend fund, which should be a good investment. But there’s a risk element to that investment. Now, certain permanent policies have a risk element. But if you look at a 20 pay, nonparticipating whole life, that’s a policy where you’re going to pay for 20 years and at the end of 20 years that money is going to pay out whenever you die. The only element, the only risk in that policy is when are you going to die? It’s not, will the million dollars pay out? It’s not what premium you’ll have to pay for 20 years. Both those elements are guaranteed. From that standpoint, I consider it an asset like any other asset.

Tom: Fair enough. We covered a lot of the basic issues but there’s a couple of new things I wanted to cover with you. First of all, now that marijuana is legal in Canada, how is that treated? Is it closer to smoking? Is it closer to drinking? I assume it’s somewhere in there.

Lorne: It’s interesting. There are a lot of changes. And these happened just before it became legalized. I think Sunlife and Manulife were the first companies to treat marijuana use as nonsmokers. Now, essentially, all the companies treat marijuana as nonsmokers. But there’s a caveat with that. You can’t be smoking a joint three times a day and think you’re going to get great life insurance rates. They won’t actually treat you as a smoker if you smoke three joints a day. What they’ll do is say you can’t get insurance or though rate you very highly, in which case, you’d pay more than just a regular cigarette smoker. But generally speaking, you can smoke two to four joints or… I’m not a huge marijuana guy (excuse my ignorance), but you could smoke two or four joints or eat two to four edibles in a week. Depending on the company, you can do that two to four times a week. Just using joints as an example, if smoke a joint twice a week and everything else is good with you, you should qualify for standard, nonsmoker rates. Smoke for joints a week and everything else is good with you, some companies will probably squeeze you in at standard, nonsmoker rates. Smoke seven joints a week you’ll probably get a rated policy. If you smoke 20 joints a week, you’re probably just looking at some type of simplified issue policy that doesn’t have a marijuana question.

Tom: That makes sense. I guess if it’s going to be legal, it’s good that they’ve kind of worked their way around this and figured out how to make it fit the insurance.

Lorne: Before that it was just treated as a smoker. If you had one joint every 6 months you were a smoker which, in my mind, is kind of crazy. The stats don’t bear that out.

Tom: I was wondering if it might have been more extreme. I thought it might’ve fallen under drug use.

Lorne: Well, there would have probably been a drug questionnaire if you smoked marijuana. I think most not all companies had a drug questionnaire but a lot of them did. You’d have to fill it in because sometimes they’re thinking if someone smokes marijuana maybe they’re going to do some harder drugs. But now it is a lot more accepted and usually blended right into the application so there’s questions, specifically on that.

Tom: The last thing I want to cover with you is COVID. It affects everything this year. How does COVID affect life insurance whether it’s the industry or the people applying? Is there anything you can think of where this has come into effect?

Lorne: The first one kind of goes into what we were talking about before in your experience meeting with the nurse. Having done this for 27 years, I must say I was amazed how quickly they adjusted to COVID. For an industry that’s very generally an old-school industry with a lot of paper and all those things, they’ve adjusted tremendously. The first thing they had to deal with was nurses because nurses couldn’t come out to see clients. It’s still hard to see some clients. The first thing they had to do is raise the issuance. They had to raise the amount of coverage you can get without a medical for a fully underwritten policy. When we look at the difference between simplified issue and fully underwritten, the big difference is a simplified issue is just answering yes or no. If you can answer no, you qualify. If the answer yes, you don’t. You can qualify for a better plan or worse plan depending on how many things you answer no to. Fully underwritten means you can answer yes to a question like high blood pressure and still qualify. They just want to get more information. Generally, a fully underwritten policy, after maybe $250,000 and up (for younger people) you’d have to meet with a nurse. Now, it’s up into the millions. Some companies even go higher than that. So they would just base the information on their stats and they were able to adjust. That was the first thing they had to adjust to. I mean, they’re not going to issue a $5 million policy without a medical. But they could issue a million-dollar policy, which is pretty unheard of, pre COVID. There weren’t many companies that could do that without a medical although there were a couple. And they’d still be underwritten. They’d ask all the questions. So that was the first thing they had to adjust to. The second thing is they just had to become more accepting with less paper. They had to scan signatures, be able to do applications online, allow brokers to work with clients, non-face-to-face because there was no other way to work with clients. And even now, other than certain parts of Canada, most insurance sales are being made non-face-to-face. I don’t have the exact stats but I’m guessing it’s probably around 90 percent, whereas before it might have been, 15 or 20 percent. It’s been a big adjustment where they had to learn to work in a non-face-to-face environment and conduct business in a non-face-to-face environment.

Tom: Yeah, I know this year has been a mess, but if there is one positive, business-wise, is all these companies did have to adjust really fast. You mentioned the insurance industry, but I’ve seen it in banks and corporations with office environments. This has been a whole new movement of work-from-home and everything.

Lorne: It’s forced companies to revisit how they were doing business. Is that really the best way to do business? I think going forward, you’re going to see some type of blend. I can only really speak for the insurance industry but I don’t think you’ll just see them go back to pre COVID. It’s going to be some type of blend of accepting more non-face-to-face solutions.

Tom: Even when the nurse would come out, I thought that was already kind of neat that you didn’t have to go in somewhere to give blood and get your blood pressure checked—that they would come to you. From a convenience standpoint, that seemed pretty decent. Is there anything else related to COVID? Are there new questions or anything like that?

Lorne: Companies have specific COVID related questions. COVID itself, in raising rates on its own hasn’t really happened much because there really haven’t been that many deaths, thankfully, in Canada, relative to what they were predicting in March. I don’t want to get into politics but if you would have said in March, that this is where we would be in September, most people probably would have said, “Okay, that’s not too bad a scenario.” If you look at the number of deaths, a good percentage of the deaths were older people in nursing homes. A lot of those people wouldn’t have had insurance. It either would have expired or they wouldn’t have been buying insurance. So there wasn’t as much risk from pure COVID. Now, what did happen that impacted things was interest rates. Interest rates went way down because of COVID issues. And those low interest rates are generally not good for insurance companies profitability because insurance companies take their premiums and invest them. And generally, they use pretty low-risk assets like interest-bearing assets, bonds, and things of that nature. Those are all paying less interest so that’s impacted things. And it will actually impact the permanent rates too because permanent policies are much more tied to long-term interest rates. Long-term interest rates go up and down, making those policies less profitable, which makes the premiums have to go up. The premiums on permanent policies have gone up and likely will go up even further if they stay at these interest rates.

Tom: That makes sense because, in a way, they’re basically investing that money for you as a form of insurance.

Lorne: Yeah. And there are certain parameters on what they can invest in. So that low-interest rate environment is not really conducive to that.

Tom: Just before we go, is there some general advice you can give someone about making sure they kind of get the best results out of applying for life insurance?

Lorne: Yes. We’ve touched on a lot of it, but just to kind of summarize some of them would be to try and get a good picture on how much you need. Another thing is, I would suggest working with the broker because that way you can find a solution that’s the best bet once you find out what you need. It becomes particularly important if you have any of the hard-to-insure issues we talked about. If you’re diabetic or have a history of cancer, stroke, have some lifestyle issues. Not a lot of people are traveling now but if you’re doing some travel it could present some issues. Each company has its own protocols so you’re going to want to find a company that matches your risk issue. And the best way to do that is to find a good broker who knows this stuff.

Tom: Thanks for going through all this with us. Can you let people know where they can find you online?

Lorne: Yeah, for sure. Our main website is LSMinsuranc.ca. That’s where you can find us.

Tom: Great, thanks for being on the show.

Lorne: You’re welcome. Have a great day.

Thank you, Lorne, for giving us a better understanding of how different factors can affect how much we pay for life insurance and for explaining why having insurance is so important. You can find the show notes for this episode at maplemoney.com/117. The Canadian Financial Summit is happening in mid-October. This is a virtual summit and features many of Canada’s top experts in the personal finance and investment communities. I’ll be giving away free tickets to the entire summit. Be sure to get your free tickets. Sign up to my newsletter at maplemoney.com/newsletter and wait for the email soon. See you back here next week Bob Lai joins us to discuss the subject of FIRE which refers to the extreme early retirement movement and whether the COVID-19 pandemic has killed it for good. See you soon.