Ellen Roseman: Insurance is personal finance’s blind spot

The federal government has been on a mission to improve your financial literacy ever since the 2008 financial crash.

To be financially literate, you need to know how to track your expenses, use credit wisely, comparison shop, save for the future, invest prudently and protect yourself from scams.

Luckily, you can find a host of helpful apps, blogs, books and online resources aimed at Canadian consumers. But where do you go for advice about protecting yourself from a financial disaster arising from loss of life, income, health, home, car or travel? I’m talking about insurance, a key part of financial literacy that gets too little love or attention from authors, bloggers and app developers. Most information comes from the companies that provide insurance – not an unbiased source.

I’m guilty of this as much as anyone. A decade ago, I helped create an online resource, Financial Basics, aimed at young people. Later, I worked with the Financial Consumer Agency of Canada (FCAC) and Ryerson University’s Chang School to turn the content into a series of e-learning videos on YouTube. 

Financial Basics workshop participants get a 45-page handbook to take home. Only one page – yes, just one – deals with insurance, giving tips such as “compare the costs with the need” and “get independent advice if you can.” Not much help.

The education gap in insurance can lead people to make costly mistakes.  

Suppose you have a cottage or chalet you assume is covered in the same way as your city home. Failing to turn off the water or arrange for regular checkups can lead to a nasty surprise when your damage claim is turned down.

The education gap in insurance can lead people to make costly mistakes

Not being well informed can have catastrophic consequences. We’ve all heard of people who travel without buying trip cancellation insurance to ensure a refund if they can’t leave home for medical reasons – or trip interruption insurance to cover the cost of going home early for medical reasons. 

Worse still is getting sick while outside Canada and being hospitalized or flown home with medical assistance. You can be on the hook for hundreds of thousands of dollars if you didn't buy travel insurance. Even if you did, you might find out that you still have to pay if you didn’t disclose your full health history.

In my 20 years as a Toronto Star consumer columnist, I wrote frequently about insurance. I helped an older woman who fell behind on her mortgage payments stay in her home when threatened with eviction. The lender had overlooked the fact that she was paying for mortgage insurance and she had since forgotten. A quick call on her behalf got it sorted. That was a satisfying outcome.

When I asked a few experts about the market gap in consumer-friendly insurance information, here’s what they said.

David Chilton, author of The Wealthy Barber, talked about life insurance in his 1989 bestseller. Most Canadians have the wrong kind, the wrong amount and often even have the wrong person insured (their kids). But there’s little about insurance in his 2011 sequel, The Wealthy Barber Returns.

“Life insurance is very complicated. Even actuaries can’t explain it,” Chilton says, adding that he sees a need for education about other types of insurance. “Travel insurance, for example, is something I always buy. It’s not uncommon to incur $200,000 in costs if you travel without it.”

Life insurance is very complicated. Even actuaries can’t explain it

Pete Karageorgis of the Insurance Bureau of Canada, an industry group that offers some consumer resources, agrees that buyers need unbiased help both choosing insurance and defining terms, such as “peril” in home insurance. 

He used to give new IBC employees an excellent guide, The Insurance Book by Sally Praskey and Helena Moncrieff, as a crash course in the topic. But this 1999 book is hard to find and there are no others like it, as far as he knows, in either Canada or the U.S.

Life insurance expert Lorne Marr has posted educational articles on his website since 2003. There are few comprehensive books about life and health insurance, he says, and almost none about making claims. “Even the data about claims (such as the percentage paid out) isn’t public,” he says. “The companies won’t release it.”

Karageorgis compares buying insurance to scheduling a dental appointment. “No one likes going and you put it off again and again. By the time you go, it may be too late.”

Preet Banerjee, author of Stop Over-Thinking Your Money!, is one of the few personal finance gurus to treat insurance seriously. In his five rules for success, number one is: Disaster-proof your life.

“No one likes going and you put it off again and again. By the time you go, it may be too late

Writing about disability insurance, he says, “You insure your house and car. You might even insure every electronic gadget you buy with an extended warranty (which could be a mistake, by the way). But what about your single biggest asset: the ability to earn an income for the rest of your life?”

Banerjee, a popular YouTube personality, also created an illustrated short video on credit card balance protection insurance. It’s definitely worth watching.

So, where else can you go for unbiased insurance advice?

There is a surprisingly encyclopedic list of specific insurance tips available at the federal government’s website Canada.ca. I wish this 20-year-old government agency did a better job promoting its financial literacy work. Canadians need to know about it when sorting through a bewildering variety of insurance products that can be difficult to decipher. 

The federal government’s website provides you with detailed articles on determining your insurance needs, getting an insurance policy, cancelling your insurance, making an insurance claim and making a complaint about your insurance provider.

You’ll want to read about home insurance for unexpected events and disasters. It says most policies don’t cover earthquakes, landslides, floods and sewer backup, but may offer add-on coverage at an extra cost. 

Even if you spring for add-on coverage, say flood insurance, you may find there’s a minimum $1,000 deductible you must pay out of pocket. And if you’ve had sewer backup damage, you may have to install a backwater valve to avoid backups and keep your insurance in force. 

The FCAC can be opinionated, when needed. Check out the example it uses to illustrate the high cost of mortgage life insurance that banks sell to borrowers.

You have to force them to deal with a topic they don’t want to deal with

“On a $250,000 mortgage with a fixed term of 5 years, at an interest rate of 5%, a 37-year-old, non-smoker woman in good health, living in Ontario, would pay $600 a year to get mortgage life insurance,” it says in a guide to credit and loan insurance.

If she looked for similar coverage outside a bank, the woman would pay $190 a year for a life insurance policy with a 10-year term or $300 a year for a life insurance policy with a 20-year term. That is substantially cheaper.

Banks base the premiums on the original amount of your mortgage loan, the FCAC says. This means your costs stay the same as you pay down the loan and the outstanding balance shrinks. Your death benefit also decreases along with the outstanding balance.

But ultimately, while the government's guide is helpful, it’s clear that there’s a knowledge vacuum in the personal finance community when it comes to insurance. And we’ll have to work at changing that mindset.

“It’s not the first thing people want to talk about,” says Marr. “You have to force them to deal with a topic they don’t want to deal with.”

 This is the debut of Ellen Roseman’s new monthly column at LowestRates.ca.  Every month, she’ll try to answer your financial questions and resolve your complaints. You can reach her at ellen@lowestrates.ca.