Living Benefits with Brian Laundry | E030
How disability and critical illness insurance can protect your largest asset.
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, and writer, interviews Brian Laundry, Planning & Insurance Expert for Advisors and Accountants, and Founder of BrianLaundry.ca. Brian Laundry is a well-known insurance expert in Canada who discusses business owners and disability planning, and what they can do to protect themselves in case of disability.
Episode Highlights:
● 00:57: – Brian Laundry describes the kind of work he does.
● 02:44 – What does disability insurance do?
● 06:14 – You almost position insurance as a hedge fund on their net-worth development.
● 07:00 – How does critical loss insurance work?
● 12:18 – What is the ‘option preference model?’
● 16:13 – Brian and Jason dig deeper in a discussion on disability insurance.
● 22:14 – What is the difference between own occupation insurance and regular occupation insurance?
● 31:49 – Acknowledge that any one of us can become disabled and out of work.
● 35:00 – What are some of the numbers related to critical illness insurance?
● 36:08 – We need coverage to protect our families.
● 37:42 – What are the odds of experiencing a critical illness event?
3 Key Points
1. About 1 out of 3 Canadians will see a period of disability during their lives, even in white collar jobs it is 1 out of 4.
2. Critical illness insurance pays a lump sum, similar to life insurance. You pick a term, a duration of cost, an amount of coverage, and an amount is paid to the owner tax-free for whatever purpose they submit.
3. The biggest conditions for critical illness insurance are cancer, heart attack, and stroke.
Tweetable Quotes:
● “For the past 7 years I’ve owned my own business and where I focus as an insurance-only expert. I work with accounting firms, other investment advisors, financial advisors, and I essentially stay in my lane. I focus on more strategic planning..” – Brian Laundry
● “Long-term disability insurance essentially protects your ability to earn an income .” – Brian Laundry
● “When you look at the group benefits booklets. What we’ve got to find out is if the employer is paying the premiums or not. Because when the employer is paying it, it is often taxable.” – Brian Laundry
Resources Mentioned:
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● FintechImpact.co – Website for Fintech Impact
● jasonpereira.ca – Website
● Linkedin – Brian Laundry
● brianlaundry.ca – Website for Brian Laundry Insurance Solutions
Full Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello, and welcome to Financial Planning for Canadian Business Owners. Today on the show, I have Brian Laundry of brianlaundry.ca. Brian's a well-known insurance expert in Canada, and I brought him on the show specifically to talk about business owners and disability planning and what they can do to protect themselves in case of disability. With that, here's my interview with Brian.
Jason Pereira: Brian, thanks for taking the time today.
Brian Laundry: Well, thanks for having me.
Jason Pereira: Oh, it's my pleasure. Brian Laundry, tell us about what it is you do.
Brian Laundry: Well, for a better part of 18 years, I've been very fortunate to have been involved with more high end, affluent planning. I started the first eight years of my career working exclusively with physicians. By working with only physicians, I was able to really understand the need for disability insurance, for advanced planning and tax.
Brian Laundry: For the past seven years, I've owned my own business, and where I focus is as an insurance only expert. I work with accounting firms, other investment advisors, financial advisors. I essentially stay in my own lane. I focus on more strategic planning. I do talking a lot about tax, and my primary focus is insurance.
Jason Pereira: Basically, I brought you on to talk about protecting a business owner's health because just to give you some statistics on what I've seen... And feel free to jump in with some of this other stuff. The reality is, especially for a business owner early on, they typically don't have a safety net unless they create one.
Jason Pereira: Basically, if they do not have coverage and they become disabled, if that disability lasts any length of time that's substantial, it could financially devastate them. And especially the younger you are, the more your wealth is tied up in what's known as human capital. The amount of money that you're going to make over the rest of your working life, that is probably the single largest asset you have.
Jason Pereira: By the time you retire, your human capital hits zero because you're not going to be working anymore. A lot of people think about protecting the assets in their life without protecting the biggest asset in their life, which is oftentimes their ability to earn money.
Jason Pereira: Some basic statistics on that, roughly one in three Canadians will see a period of disability during their lives. Even in white-collar jobs, because people often think that has to do with heavy lifting and things that involve physical labor, it's still close to one in four. So, very substantial risk.
Jason Pereira: Brian, let's talk about there's two different types of policies that really help with health-related issues. The first one, the big one, is disability insurance. Talk to me about what it is that disability insurance does.
Brian Laundry: Yeah. Actually, I'll expand that to three with long-term disability insurance, critical illness insurance being the most prevalent and most common. One most often misforgotten or I guess forgotten would be long-term care insurance, a very popular [crosstalk 00:02:58].
Brian Laundry: Long-term disability insurance essentially protects your ability to earn income. I think you raised a really good point in this podcast because anybody who's had a lot of experience working with business owners, we've been kind of trained to ask for the shareholders agreement. Let me see your shareholders agreement. Do you have a shareholders agreement? We won't spend much time talking about that, but in the instances where there is a shareholders agreement which seems to be very infrequent, when you do read it, it's very, very easy for an insurance expert to say, "Hey, if you die, what happens?"
Brian Laundry: As you laid out statistically speaking, there's a higher likelihood of not dying. Having the long-term disability insurance conversation is vital. As you said most business owners, they may not be the best investment clients for an advisor like yourself because all of their money's set up in their net worth and their business. They might not have a lot of liquid assets or savings.
Brian Laundry: Long-term disability insurance provides us an opportunity to ensure their income. Critical illness insurance is a bit different where it pays a lump sum similar to life insurance. You pick a term, a duration of cost, an amount of coverage. That money is paid to the owner tax free for whatever purpose they see fit where long-term care insurance has an interesting angle now, is in Canada, many of the insurance companies have pulled out of that space.
Brian Laundry: There are very few insurance companies offer long-term care where it pays if you're unable to perform two of the six activities of daily living. You've got your dressing, bathing, toileting, eating, transferring limbs and cognitive impairment.
Brian Laundry: What's really nice is there are some companies out there who build those definitions into their critical illness policies.
Jason Pereira: My only concern with that is that we look at the average size of a critical illness policy that's still sold in Canada. It's small. It's like sub-100,000 still I think. When you look at how much money is required to properly cover someone for long-term care, it is orders of magnitude greater than that. It's good that it's there, but it shouldn't allow us into a false sense of security.
Brian Laundry: Oh, I couldn't agree with you more. I think the more telling problem is the lack of ability for an advisor to position the right amount of critical illness insurance. If you want to back into the real problem, I think the real problem is as an advisor, if you speak at a conference like I do and people ask you how do you arrive to a critical illness amount, we get these very interesting ways of doing it, a multiple of income, insure your debts, insure an emergency fund, whatever it might be.
Brian Laundry: I think what we really need to do is look at the numbers and say, "What infusion of money provides the most protection for your family?" There's also one other point here. I don't like fear tactic selling and even [inaudible 00:05:27] can get old, but I can speak to myself.
Brian Laundry: I mean I've had two unexpected back operations the past five years. Neither one of those situations would I have claimed on my long-term disability because I had surgery before that, but I'll tell you. For a person who can't get long-term disability insurance anymore, long-term care is a wonderful alternative B2B critical illness coverages.
Jason Pereira: Yeah, because if it's permanent. Then, basically, it's immobilizing you. Then, it could pay you at a very early age compared to what's normally [inaudible 00:05:56] pay which is in your 70s.
Brian Laundry: Right. I guess when I look at living benefits for business owners, I acknowledge there's a need for risk. I think everybody can say we understand there's a risk component to this. You did touch on human capital. I think there's also a strategic element to it because these things have to be fit into the plan.
Brian Laundry: I often find when I start talking about insurance in particular especially for those who are very astute investors you almost need to position the insurance as a hedge. It's a hedge fund. It's a hedge investment. You need to change the vernacular from insurance to something that they recognize is a hedge on their net worth development. It's been very valuable for me because it's a psychological gain this business because it's not about saying the word insurance because as they say, it's sold not bought, but it's not positioned correctly.
Jason Pereira: No, it's not. That was a lot to unpack. Let's take this one step at a time. Actually, let's start with critical ones because it's the easier one to understand. Frankly, it's the one that pays faster if something happens to you. Critical illness insurance, tell me about what it is and how much it pays. We can talk about different methods for figuring out how much is enough.
Brian Laundry: Okay. Really simply, the biggest conditions you'll hear about are cancer, heart attack, and stroke. Often, the coverages cover 25 conditions, deafness, blindness, motor neuron disease, transferring limbs... or sorry, not transferring limbs. [crosstalk 00:07:15]
Jason Pereira: ... interesting pitch to throw, right arm from the left side.
Brian Laundry: Yeah. Seriously. To raise the point, if you get diagnosed with these things and most Canadians have family and friends, stories, anecdotes about those happening, that money gets paid tax free for whatever purpose you see fit.
Brian Laundry: It is the one that seems to be the easier one to sell if you want to use that word. When it comes to arriving to amounts, you're right. The coverage amount is relatively low because, often, the insurance positioning is based on affordability. I don't want to scare the client off of the premium number.
Brian Laundry: In my experience, you see a lot of agents will say, "Look. You need a million dollars a 20-year term life insurance," which is an easy decision. Hey, let's slap on some critical illness. It looks like you can afford 50,000. Let's go ahead and do that.
Jason Pereira: Yeah. In fairness, here's the thing. I think you hit upon it. I think that there are methodologies for how we come to the amounts of other insurance that are very straightforward. For example, life insurance. You can do a needs analysis as to what's the financial impact if you die today or you can do a needs analysis as to what's the estate liability if you die down the road.
Jason Pereira: Those are easier tangible numbers, disability. The reality is unless you've amassed the wealth, you pretty much need to protect as much as you can pretty much or at least enough to maintain your lifestyle into retirement. Then, long-term care, there's benchmarks for how much things cost.
Jason Pereira: With critical illness, when you get sick, how much is enough? Well, ell good question. It depends on how long you're going to be sick. Is it going to trigger disability? What are the ongoing care costs? Are you going to wait around here for treatment? Are you going to go somewhere else like the US? It is. How long is a piece of string on this one?
Brian Laundry: Well, actually, it's interesting if you think about it because when you look at long-term disability, critical illness, and long-term care next to each other and there are finite premium dollars. We all know they all pay at different junctures. The answer to the question of what to buy and how much comes down to tell me what you're going to get, what conditions are you going to be [crosstalk 00:09:09].
Brian Laundry: The reality is if you have a heart attack, you likely won't claim on your long-term disability or your long- term care because you [crosstalk 00:09:17] the waiting period.
Jason Pereira: For that record, that was my very first claim, a 40-year-old with the freak heart attack like not even the case that you would like healthy [inaudible 00:09:26], some sort of blood clot, heart attack got paid, never saw a penny from his disability because he missed about a week of work.
Brian Laundry: Well, the one I had, my first one was a doctor at my old firm, $400,000 claim, two different companies. His name was Kiram, Dr. Kiram. That's not his last name obviously, but Kiram called me and said, "I had a heart attack." I said, "Geez, are you okay?" He goes, "Yeah. I've lost 15 pounds" I want to buy a truck. I'm eating better and my life is better. What a great thing that happened."
Brian Laundry: It's a really bizarre claim story, but that's what a heart attack could be, but you change the narrative a bit. Well, what if you have a severe car accident or a back injury like mine? Well, unless, I'm paralyzed or lose access to my limbs, I might not be claiming on the critical illness insurance.
Brian Laundry: I would be claiming long-term disability or long-term care. The worst case scenario is as you alluded to [inaudible 00:10:15] a blood clot in his heart which caused a heart attack. Well, a blood clot in your brain is a stroke.
Jason Pereira: Oh yeah, or in your heart's a pulmonary embolism. It can be any number of things. You can lose a limb.
Brian Laundry: The job that we have is to educate about the risks and then pull it back and say, "Okay. We now need to be strategic about the premium dollars and what's most important." The reality is long-term disability in my opinion is the most important, nothing happens without an income.
Brian Laundry: For critical illness insurance, here's another little thing. When you do retirement modeling, you can simulate a critical illness. If you essentially took a baseline retirement model and if somebody was now on long-term disability and they were able to live on that, that's the presumption. [crosstalk 00:10:56].
Brian Laundry: Now, what you do is you go into your software. You say, "Well, now, they can't save. You put zero everywhere." But what's going to happen is that fully funded retirement plan will likely have a lot of red in it. You're going to have some shortfalls. What you could do is present value that shortfall. There's what we need in today's dollars using a certain rate of return assumption to infuse into the plan to make you whole again.
Brian Laundry: It's a mathematical way of doing it, but again, it also assumes the advisors involved is doing retirement modeling.
Jason Pereira: Which is a full plan which is a minority of us, right?
Brian Laundry: Right. Yeah. It's tough. One last thought on critical illness and the need, when you're speaking to young couples in particular, if you took that methodology, the numbers that they're going to need for critical illness are huge. They'll need 700,000, 300,000 because they have no savings. Our job is to do the math, but it's also my job to say, "We're not insuring you for 700,000." You can't insure the entire risk.
Brian Laundry: You need to understand where things fit.
Jason Pereira: Yeah. It's funny, in my process, we literally go through every form of insurance no demand, just to educate them. One of the first things I say is that, "Look. You're probably going to have some need for a lot of these things, but we're going to focus on where the dollars should be spent," because, quite frankly, you shouldn't have to take a second job to afford all the insurance in your life. That's the reality.
Jason Pereira: We have to accept some risk. Now, I agree with you. The planning methodology for determining how much CI necessary is far better than any kind of rule of thumb. But it is a heavy lifting one. The alternative shortcut that I've been planning on writing an article on and I will at some point do this, is what I call almost the option preference model. We look at the things that what people would use [inaudible 00:12:24] to cover and then kind of put a benchmark on each of them.
Jason Pereira: For example, disability is not going to pay you for 90 to 120 days. Basically, maybe you should have enough to cover that off, replenish an emergency fund. Are you the kind of person who would pick up stakes and go to the Mayo Clinic, right? What does it cost for something like that like?
Jason Pereira: Look at all the different things that people would do with critical illness and have a conversation. If you got sick, what is the realistic need to cover off these preferences? It's not as good as the planning model, but for someone, the reality is most advisors aren't even doing a needs analysis. This is a good concept for a needs analysis beyond the current ones we see which are silly because I mean don't get me wrong. It would be nice if my mortgage got paid off if I had a heart attack, but if I'm like that 40-year-old who went back to work a week later and had very little long-term impact from that, that was a lot of premium to pay.
Jason Pereira: Now, it worked out for him, but at the same time, it's not necessarily for anyone. But to be clear and to sum it up before we move off of CI, critical illness essentially, you get sick by list of covered conditions. By the way, cancer is like of 66% of all these conditions. Yeah. Let's be clear. Life-threatening. If you get a tiny form like was it if you get like melanoma early stage or T1, T2, whatever the first two levels of prostate cancer, if your probability of survival is 99.9% from that form of cancer, you'll get some sort of small benefit. You won't get the whole thing or you might not get...
Jason Pereira: Again, it's not meant to, oh no, this is the cancer version of a cold for lack of a better term, [crosstalk 00:13:50] impact.
Brian Laundry: I think the one that people might recognize the words a bit more of is an angioplasty. An angioplasty, you get your doctor. They stop the heart attack by fixing it. That's an early intervention benefit. It pays a small amount. Your contract continues and guess what, you're fine now. You're right. There's some early intervention benefits there.
Jason Pereira: Yeah. There are some definition ambiguities around this stuff like some people get a little bit... There's one company on the market specifically who says like, "Look. People hear the word cancer. We don't care what form it is or if they're guaranteed 100% survival rate, they hear cancer they expect to get paid." We pay them somehow, but at the same time, it also comes down to cost-benefit.
Jason Pereira: That's [inaudible 00:14:25] one, very simple. I get sick. I survived 30 days. I basically have money. Interesting enough, this was considered by a doctor in South Africa who discovered that people were losing life savings over illness not their lives. Now, we probably have better social health care here, so you're not losing life savings, but it can be financially detrimental. [crosstalk 00:14:43]
Brian Laundry: A [crosstalk 00:14:43] companies have now eliminated that 30-day [crosstalk 00:14:46].
Jason Pereira: Oh really? I wasn’t aware of that.
Brian Laundry: There's a lot of progress in this. I'm not going to get into medical diagnosis and better statistical studies, but a lot of people out there, the 30 days isn't really a requirement for all companies anymore.
Jason Pereira: Well, let's also talk about why that is, right? I think that 30 days was there in part because essentially like this was meant to pay you if you live, not if you died. If you died, you had life insurance.
Jason Pereira: The other interesting point we should make sure people know is on underwriting. Once this thing is placed, basically, you are not covered for cancer for the first 90 days, is it? Is that correct or is it the third?
Brian Laundry: I's something like that. Yeah.
Jason Pereira: There's something. The reason is because there's no test in the world that proves that you're completely absolved of cancer. You can have one free-floating cell, but the reality is that as long as you didn't know that you did this while you had it like when you applied, [inaudible 00:15:35] perfectly fine and covered.
Jason Pereira: That's the critical illness portion. Let's move on to disabilities. As we said, this is the bigger one. It's not infeasible to think that somebody even getting out of university applying normal wage increases and what they would make between the time they get out of university to the time they retire about 65. Then, we're talking about lifetime earnings exceeding multiple millions of dollars.
Jason Pereira: To lose that, and people don't see that. They see the today's paycheck, but when you look at that entire lifetime worth of money, to lose that, it's not... Dying is one thing. You're gone. Your expenses stopped. Disability's something else. Your bills still keep coming. How does disability insurance protect for that?
Brian Laundry: Well, I think the mindset I would have is think of your 30-year-old couple, a single income family maybe young children. If that primary income earner goes down and there's no mechanism to earn money, you can start using your savings and sell your home. I could prove you're out of money in five years or less.
Brian Laundry: Having that paycheck is vital. When you claim on a long-term disability policy as you said before, there's a waiting period. Usually, it's in 90s. Sometimes, you could pay some more money to get it sooner, but when you have a monthly non-taxable benefit in your bank account that's indexed with inflation, if you get the cost of living adjusted by which I would highly recommend to anybody who's young, it's a no- brainer.
Brian Laundry: When you lock in your costs at such a young age, I think it's really important to-
Jason Pereira: And your health for that matter, right? You're getting it when you can.
Brian Laundry: Talking to a guy, I can't get it anymore. I've had two knees and two shoulder surgeries, two back surgeries. Nobody's insuring this guy for long-term disability. I need to be strategic with products that might get the coverage which is a topic that maybe we can cover later on, but I look at things like what else does the contract provide.
Brian Laundry: Most insurance companies offer a future income option something whereas if I prove that y my income has increased over time which hopefully it does, we can increase coverage without providing that medical evidence. That's hugely advantageous.
Brian Laundry: When I look at young couples, the maximum amount of coverage might only be a $2500 month after tax, but if we can scale it up by another 8000 over the course of the contract without evidence, these are very strategic tools that, in my view, if you have a client relationship and you manage their money, when their income goes up in two years and you see the tax return, they've got a new job and their earning is up 40%, you want to have the tool in your tool belt to say, "Hey, we're going to go and [crosstalk 00:17:53]." What else are you doing during your annual review?
Jason Pereira: Well, not only that. Having to do a full medical underwrite for every small incremental increase like talk about a massive pain, but yeah. I mean like in these cases, let's use the example of that 40-year-old, if you had a heart attack and he's 40 years old and he had a disability plan with an FIO, future income option, that person would still receive a letter saying, "Do you want to increase your coverage without medical evidence?"
Jason Pereira: They couldn't deny it. They couldn't deny it whereas if he wanted one now, good luck. I don't know what the disability companies would say. Oh probably not, not until he's been... That said, depends on the severity and how long it's been clear, but still nevertheless, it is difficult. Yeah. There's lots of little benefits. We'll come back to that, but the core benefit, pretty straightforward, you become disabled. You're disabled for X number of days. You'll pay you as long as you're disabled. Then, it will stop at some point in the future usually age 65 or depends on the termination date.
Jason Pereira: Let's talk about what constitutes a disability. This can be different depending on the term for definition of disability. Talk about the three different levels of disability coverage and what each of them [crosstalk 00:18:53].
Brian Laundry: Yeah. The three definitions. The best way to introduce this is when you talk about people who have plans with their employers which isn't everybody by the way. Not everybody gets the benefit of guaranteed insurance coverage. If you claim all those plans, the definition for the first two years is your occupation which is are you able to do the duties of your regular job for training skills.
Brian Laundry: But after two years, there's a big difference in the definition where it changes the thing called any occupation or essentially if they feel by working with your doctor certainly reading reports that you're capable of doing any job which is including but not limited to the greeter at Walmart. It doesn't even mean they're hiring. They can take you off the claim.
Brian Laundry: Now, I will say I have some more situations where the group plan continues to pay [crosstalk 00:19:37] off, but that's how the-
Jason Pereira: Yeah. The old story of like, "Well, if you can flip burgers at McDonald's, guess what? You're off the plan." I don't think I've ever seen that quite honestly.
Brian Laundry: I know. I'll tell you. I've been involved in a couple of claims in that situation. I wouldn't say like they're emotionally tied to it. I just think there's more of a spirit of the deal that that maybe is advertised, negative [inaudible 00:19:58] [crosstalk 00:19:59].
Jason Pereira: Absolutely. Then to be clear, those plans typically have about a two-year range before it drops off, right?
Brian Laundry: Yeah, two year [crosstalk 00:20:06] until it drops off.
Jason Pereira: Yeah. Interesting if I may sort of [inaudible 00:20:09], the reason for that two year which is interesting to note is that statistically if you're disabled for a period of two years, the odds of you ever going back drop like a rock. Honestly, if you're a regular [inaudible 00:20:22] for two years and you've been disabled for two years, there's a very, very, very good chance that any [inaudible 00:20:27] will cover you because the odd's [crosstalk 00:20:28].
Brian Laundry: If you didn't have that I don't want to call a stop loss because it's not a loss, but a there's a line in the sand where employers insurance companies can throw their hands up. That keeps the stuff affordable for the mass. The one last thing I'll say about the group stuff before I move on to regular occupation, when you look at the group benefits booklets, we got to find out is the employer paying the premiums or not because when the employer's paying [crosstalk 00:20:50] often is taxable.
Brian Laundry: People don't know these things. I think it's our job is to identify-
Jason Pereira: Well, I've debated HR people who insisted that they wanted the employer to pay for it. [crosstalk 00:20:59] Hold on. Yeah. Let's talk about what actually... I know you're worried about your dollar today. You're not looking enough like the tens of dollars tomorrow if this happens to you. As long as you just got to spell the math and sometimes don't listen, but, yeah. It's crazy.
Jason Pereira: To be clear, it's very simple formula. If it's being paid for by the employer which means you're not paying for it, it's a taxable benefit. If it's not being paid for by the employer and you're paying for it, it is a tax- free benefit. There is no little [inaudible 00:21:26] on this. Your employer pays a single dollar. It's taxable. End of story.
Brian Laundry: I get that for entry level employees who might be making a $30,000 a year. The taxable portion is so low relative to their income that it's probably not attracting much tax, but either way, moving on to the regular occupation, this is the definition that we tend to lean on.
Brian Laundry: Using the physician example is probably the best one. If you're a GP or a family doctor, you'd probably use the regular occupation definition like most professionals. If you can't do the duties of being a family doctor, it pays you until you're 65. The own occupation definition and this is really where we got to be cautious about who we added to. I've seen a lot of family doctors who have an own occupation writer so the additional cost onto their contract.
Brian Laundry: But I can't imagine the circumstance where they're able to claim. What is [crosstalk 00:22:12].
Jason Pereira: Let's talk about the own occupation. What's the difference between own-occ and regular at first because I know you're going with this.
Brian Laundry: Yeah. Own-occupation is very specific. You're not able to do the specific duties of your own occupation. [crosstalk 00:22:23]
Jason Pereira: One specific job. It's like surgeon.
Brian Laundry: You are a neurosurgeon, right? You're really good at neurosurgery. Maybe, you also play hockey. Maybe, after several years of playing men's league hockey, you start getting a little bit of the shakes in this hand. You can claim on the fact that I can't do neurosurgery, but I'm not permanently disabled.
Brian Laundry: The own occupation definition allows payment of the insurance amount because you can't do surgery, but it's not saying you can't go get a job teaching surgery.
Jason Pereira: Yeah, or be a GP.
Brian Laundry: Or be a GP or do the rounds in the nursing homes or whatever it might be, but a cautionary tale, when you do a review of an insurance policy, sometimes, you see these own occupation writers added, but they're really not applicable. I just don't know what it is about my job that's so owned, so specific that I can't [crosstalk 00:23:07].
Jason Pereira: Yes, because regular occupation means basically something similar that you were reasonably trained for. You could stop doing insurance. Again, you could teach insurance. On a regular occupation, if you went from doing what you're doing today to teaching it, you would not basically get a benefit. I'll give you a real life example.
Jason Pereira: A client personal friend of mine, chiropractor for years, developed severe version of carpal tunnel syndrome and something else with his shoulder, physically could not adjust people, could not do anything there. He has an own occupation policy. That thing has been paying him for the better part of eight or nine years now.
Jason Pereira: Now, he's gone out, re-educated himself and become a [inaudible 00:23:46]. Yeah. Exactly. He's doing just fine. He was able to support his family through the period of education because of this. Again, I think, in my opinion, it's one of these things where if you have a very narrowly defined job, that if you lose that job, you're not going to make the same kind of money [inaudible 00:24:04] makes a lot of sense.
Brian Laundry: Yeah. There's two more points I want to make on disability. I'll say them first in case you can get [crosstalk 00:24:10]. The first one is talking about association coverages for a lot of professionals. The second one, I don't want to forget talking about return of premium. I think that's a key point.
Jason Pereira: Oh yeah. We'll go there.
Brian Laundry: Yeah. Let's just talk really briefly about association. This is really, really important. It's like most things in life, follow the money. Find yourself where the interest of the advisor is. I'll just use the Ontario Medical Association as an example. This holds true with the CPA and some others. When you look at long-term disability insurance with the OMA, I could position it as a group association policy. It's not as good.
Brian Laundry: What happens if the price goes up? What happens if it decides to cancel? I can be the fear-monger, but ultimately, if you looked at the underlying contract itself, it's always been a very strong contract. The price for the OMA plan is often less 60% less than the price for a plan that I can sell that I get paid for.
Brian Laundry: My interests are aligned with selling the individual policy and not the OMA plan for that example. Now, I'm not saying the OMA plan is a better contract front to back, but the value is there. I think it's our job to show it.
Brian Laundry: I also think it provides a unique opportunity for us to say two things. One, maybe we do one of each at the time they claim. We have two companies adjudicating a claim. That could be very helpful playing one off the other. Second, when you have situations where people have finite dollars for premium, what if they have the decision to say, "So you're saying I can save my money with my association plan, which is 90% or 85% of the plan of the individual plan?"
Brian Laundry: Now, they can go up by their critical illness insurance. I think it's really important. There's a lot of information. You don't do it all in one meeting, but we need to be equipped to help people make those choices.
Jason Pereira: Now, here's the other thing too. I think we've been beating around it without really talking about it is that life insurance is straightforward in a lot of ways. You're dead. You're dead unless you're some guy who basically started a cryptocurrency exchange that basically somehow disappeared, died while on vacation in India and the cryptocurrency is all missing. You may or may not be alive in Costa Verde wherever else.
Jason Pereira: Unless you're dead, you're dead. It's like, "Okay. Here it is." Whereas when it comes to living benefits, there are nuances to these contracts. There are real tangible differences to these contracts. If you're dealing with someone who's basically going to put in place a disability policy, they better understand not just what's in that policy, but what's out there in the marketplace and how it applies to that specific basically risk that you have attributable your job.
Jason Pereira: Like I said, there's a fair degree of complexity. It's also reflecting the fact that this is also a lot harder to underwrite than life insurance. It looks expensive on the surface even though not having it is far more expensive, but there's a lot more... With life insurance, it's like, "Oh, you're approved, declined, or rated." With disability, it's like, "Oh, yeah. You, we're going to cover you except for this thing like your first knee surgery."
Jason Pereira: If you were looking for coverage at your first knee surgery, it's like that's fine, "Brian. We'll take you except for that knee."
Brian Laundry: You have quite the reputation for exposing the interests of advisors. I know we know that. My next comment I think you're going to appreciate because this is for a person who does insurance as often as I do, it's my sole occupation how I generate revenue.
Brian Laundry: When I look at the reason why living benefits are not sold, the answer is actually exceptionally simple. I share this with clients. It is really, really easy when you have a client or a customer who has finite dollars, let's just say, $300 a month, pick a number. It is really, really easy to sell living and dying. It is very, very easy to position after we get over the hurdle of death. Here's term. Here's permanent.
Brian Laundry: We should all want permanent life insurance, but we all don't need it. I think if you have $300 to sell something, you know you have a budget to work with, it is really easy to say, "Well, tell you what. Let me give you some of that good stuff." Tack on some of that cheap stuff because I'm getting my 300 bucks a month. I can establish value as an insurance expert.
Brian Laundry: Now, that might be true. That particular advisor skill set and interest might be in that client, but their skills are lacking because to me the reason why you only do life is because it's easier to get the 300 bucks of which we get paid off [crosstalk 00:28:10] What's hard is talking about the stuff we're talking about and positioning it appropriately and educating and taking the time and not to mention the underwriting efforts of doing these things.
Jason Pereira: Substantially [crosstalk 00:28:22].
Brian Laundry: $300 budget, the same relative commission and revenue for me. Which one's easier?
Jason Pereira: Life is so much easier. Life is so much easier. People know what it is. They don't necessarily question it. They think that they get married, they buy a house. They have a kid. They think, " I need life insurance." No one stops... A lot of people just assume disability like, "Oh, my employer is going to take care of that or the government's going to take care of that, whatever." They don't get educated.
Jason Pereira: What you're saying and again thank you for... [inaudible 00:28:49] the interest of advice, but the reality is that when it's supported by the evidence. No. I haven't seen this date in a little while, but last I saw was probably about six years ago, and it was a statistic on the number of insurance license advisors would sell the life insurance policy. Took that statistic of like how many of us sold the policy last year. Okay. Great.
Jason Pereira: Now, let's survey them. How many of them have sold a critical illness policy in the last year? That number goes from all the people who sold life insurance policy in 12 months down to 10% of the population. When you look at how many people of that group had sold a disability policy, that number dropped to somewhere around six. That is utterly frightening as to think as to how many people are out there that do not have coverage, have an insurance advisor, feel that they are taking care of and are absolutely just exposed beyond belief because, yeah, you covered the cheaper bigger cost.
Jason Pereira: You know what's also easier about life insurance, is that you pay me 300 a month and maybe that gives you two million. You give me 300 a month for disability. That number's going to look something like 2000 a month for benefit. But I actually think one of the things I always make sure people are informed when we talk about disability is, okay, 2000 a month, this much between now and the day it ends. That number gets smaller every month.
Jason Pereira: But it takes for a young person. It could take that 2000 like I'm paying 300 for 2000 seems like a bad trade off. No. You're paying for 300 for three million which is going to diminish, but that's how much you stand to lose. That is a much more powerful conversation, but these conversations are not being had unfortunately.
Brian Laundry: If you want and you might cut this from your podcast, but there's a story sometimes I've shared depending on the client relationship I have with people, you always the following of your objection. It's often from men. I'm not going to get sick. I can't imagine a situation where I don't show up to work and do whatever it is that I do.
Brian Laundry: They're not wrong because we're not so old to not feel invincible, but we're getting old enough that we feel some aches and pains. The story I kind of shared, it's a funny one, but it makes sense. Let me position this. Jason's been married for a long time, lots of beautiful kids, great business. Your wife finds a better looking younger, richer Jason. Now, [crosstalk 00:31:01].
Jason Pereira: Oh, that can't happen. Younger.
Brian Laundry: Well, [crosstalk 00:31:05] That's marital situation that maybe not doing so well. Maybe it turns out that Jason only gets to see his children once a month. That might turn into Jason having a more difficult time getting to work every day. He's a bit depressed.
Brian Laundry: He finds himself at the bar having a few pops. That leads into depression and alcoholism and whatever it might be. That's the disability. We're not talking about you went to hockey and broke your elbow like this is-
Jason Pereira: Which happens.
Brian Laundry: Which happens, but I think a story like that as silly as it is, I think you and others can visualize a story or a person in your head where it's happened.
Jason Pereira: Yeah. I'll add a couple stories of that. You're absolutely right. I would say that people don't stop to realize the fact. They always think about, like I said, physical labor being the cause of disability when something like 30 to 40% of all claims are mental nervous disorders. That includes something as simple as depression. Come one. Who of us hasn't had a bad moment in their life or bad time with their life where we had maybe we got over, but we had some form of moderate depression that would probably be maybe clinically recognized. Who knows?
Jason Pereira: You made a point about hockey in the elbow. There's actually a well-known case in Toronto where a senior executive at a major financial firm who was playing pickup hockey and non-contact had his feet accidentally taken out from behind him because the guy was dragging his stick. He had a concussion to the degree that he never went back to work.
Jason Pereira: The one I'll share, one actually funny story, there was someone who basically said, 'That's never going to get disabled. You're full of crap." I'm like, "Wow. I was not aware that you were able to see into the future. Do me a favor. What stock should I buy today?" They just looked at me. It's like, "Okay. Your point's taken." Just acknowledge it is possible. That's the first thing. Acknowledge it's possible.
Jason Pereira: It's funny. I find it's actually harder for people to deal with their own morbidity as a possibility than it is for them to deal with their own mortality as a possibility because we all grow up knowing we're going to die one day. We don't all grow up thinking we're going to not be able to work one day.
Brian Laundry: I know you're the host, but I'm going to put a question to you. What is your philosophy for return of premium on long-term disability and or critical illness insurance?
Jason Pereira: Critical illness insurance. Let's take a step back. Let's explain the concept. Return to premium is basically a way of "getting rewarded for staying healthy." Basically, on every anniversary, let's call it, you're usually around eighth year, you'll receive a portion of what you put into that policy back. Let's call it 50% which isn't something. [crosstalk 00:33:26] Exactly.
Jason Pereira: You can add on this benefit at a cost which is not a small sum. Now, interestingly enough, so you have one of two possible outcomes. You either become disabled in which case the amount you put in relative to what you get out of it is enormous... Sorry. The amount you get out of it versus what you can get out of is enormous.
Jason Pereira: If you become disabled the rest of your life, who cares what that return a premium cost even if you didn't use it, because the ROI is enormous. If you stay healthy, if you look at what the internal rate of return is pre-tax on basically getting back to... What it costs for that incremental amount versus 50% of the total premium, you will typically find that that number approaches 6%.
Jason Pereira: It's not a guaranteed 8%. It is a guaranteed 8% if you stay healthy. That is again after tax because it's tax- free. If you're in a situation whereby you're in a high marginal tax rate, then that's the equivalent of you making almost 15%. It's an odd, odd thing that we have an incredible investment opportunity buried within a disability plan.
Jason Pereira: We have this unique opportunity to buy this incredible rate of return product that there is a possibility we get zero out of it, but if we get zero out of it, it's because we've gotten more than we would have anyway from disability benefits.
Jason Pereira: I personally love it, but again, here's the thing. I think it's secondary to all your risk needs. If there's only enough money to get you the life insurance, the disability, and the critical illness, you need and you can't pay for the ROI... oh, sorry ROP, then you go without it, but if you can, it is a great opportunity.
Jason Pereira: Critical illness, I've looked at the numbers. I have to look at it again because it depends [inaudible 00:35:00] recently. [inaudible 00:35:02] most of these require you to terminate your policy at the end of the period, have you not?
Brian Laundry: Yeah. [crosstalk 00:35:07] a definition of 100% return of premium in 15 years or [crosstalk 00:35:12] or at age 75 or-
Jason Pereira: Yean, but you have to terminate coverage. Those are less appealing to me because you're giving up coverage the time that the probability goes up that you're going to actually have it. I actually previously, a long time ago, saw one of these like first generation critical illness policies that were incredible. Literally, you would get, I think, 75% refund of all premiums every 10 years, and the coverage continued.
Jason Pereira: If that existed today, I would sell it nonstop. That is fantastic because the ROI on that is incredible. I mean it's an interesting thing because we talk about insurance from a risk standpoint first. This is marrying investment return option on top of it.
Brian Laundry: Let me [crosstalk 00:35:55] your thoughts. If we exclude the more complicated stuff for business owners split dollar critical illness, exclude that. Just put that to the side. That's a conversation-
Jason Pereira: That's a different story. That's actually mispriced, but we can go back to that.
Brian Laundry: Yeah. [crosstalk 00:36:09]. Right. Here's an easy way that I look at things. To me, it makes it very simple for consumers for clients. We need coverage. We need to protect our family. We want to return a premium.
Brian Laundry: I have yet to meet a person who owns a return a premium contract when they get that check every eight years. They aren't celebrating the $7000 check they got from the insurance company. I have yet to see a person who's got to age 65 and cancel the policy. They've got their 300 grand. It's cash. It gets infused into their retirement savings or whatever. They're never sad or mad.
Brian Laundry: I look on the very simple basis once it needs. If I'm telling you, you need a million dollars of life insurance coverage, you need a fully funded long-term disability plan, you need some critical illness and I have $500 a month, don't do a reduced amount of coverage because you want your money back because if you go down in a month or a year or five years, you're not getting what you need.
Jason Pereira: Exactly.
Brian Laundry: I find when you separated wants and needs, it becomes very clear what the right choice is.
Jason Pereira: 100%. The primary reason we're doing this is protection. The sweetener on top of it, that's nice.
Brian Laundry: Yeah. The retirement premium for critical illness insurance, I think, fits exceptionally well again excluding the advanced tax stuff, split dollar. If you're a physician, for example, or any business owner who has accumulated a lot of cash in the company, you're risk adverse. You're maybe battling the passive taxes, whatever it might be. It's quasi cash. Jim's $70,000 a year into a $2 million criticalness policy with return of premium, if you don't use it in years which by the way you likely won't, you don't need the premium, you don't need the money. If you-
Jason Pereira: Let's go over those stats. The odds of you having a critical illness pre-age, I believe, 75 as a number is roughly about 50%. In fact, in the odds of two members of a couple having at least one member have critical illness, are about 75%. The way I like to say that is if you go to dinner with three other couples. You and your spouse go there with three other couples. Statistically, three of those four couples will experience a critical illness event before age 75.
Jason Pereira: The numbers are pretty staggering, but yes. You're right. It's less likely to happen when you're younger, but if it does, it's more devastating.
Brian Laundry: Well, it is. I'll tell you where I think most people in my business I wish their mindset was is that when you buy an insurance policy, you're buying a 20 to 50-year commitment to a client. You have to ask yourself your litmus test with your five-year phone call, your 10-year phone call, your 20-year phone call because in five years, if I sold a $100,000 of ROP to Jason, [crosstalk 00:38:29] million dollars a 10-year term when I knew you needed the term, well the phone call is you're calling. You're not dead. You're sick.
Brian Laundry: Remember, how I gave you the 100 grand, but you could have had a million for the same price. Whoops. We need to ask ourselves [crosstalk 00:38:43] what's that phone call feel like and what's it look like. You ask yourself that question because you're the one receiving it.
Jason Pereira: Yeah, I mean honestly, there are two things. First off, we know what the reason is. It's because of the incentives. They're all front-end loaded compensation. The compensation model is not one of stewardship unfortunately which I would love to see that change because you'll see less churning. You'll see more maintenance. Suddenly, these clients that no one calls because they're just policies sold 20, 30 years ago become valuable because if you're servicing that orphan client, you're actually going to get compensated for it.
Jason Pereira: How are you going to feel if you get that phone call? I kid you not. Unfortunately, I will say this much. Of all the clients I have, the ones who listen to me the least, it's a two-ranked order. A family listens to me the least by far, but that's everybody. Then, friends are the ones who are second because they were like, "Oh, have you watched..." They're just not the same level of commitment to the process.
Jason Pereira: I've literally said that people like, "Yeah. I don't want to get to this." I'm like, "Listen. I don't want to call your wife after something's happened to you, and basically hand over a check that is a fraction of what it should be knowing it's putting them in a terrible position. As your friend, don't put me in that position. Don’t put your spouse. Don't put your family in a position. Don’t put me in that position.
Jason Pereira: That is terrible. These are people that have been a large part of my life, but they're the ones... Some of them, unfortunately, are stubborn enough [inaudible 00:40:01].
Brian Laundry: The shame of this is... You and I have a certain level of passion and compassion to people that we work with. We think a lot about this. I'm in the business where I work with advisors. The advisors that I work with have decided I am not an expert in this. I'd rather have an expert help my clients in the collaborative environment.
Brian Laundry: For the amount of advisors that pick up the phone and call me for me to do this work, there are 10 more that say the following. They say, "My clients don't need insurance."
Jason Pereira: Oh, god. How do you know? What's your needs analysis proving that [crosstalk 00:40:33]?
Brian Laundry: I'll tell you you're as probably more into academia than anybody that I know. There's a lot of really smart people, a lot of letters after their names who sound really stupid. I hear it often. It's frustrating for people [inaudible 00:40:46], but it's nice to hear that you're taking in. You're thinking about this stuff in a way that is compassionate because you got to think about... I just did your plan. What if stuff happens? It's a real life version of a Monte Carlo analysis.
Brian Laundry: If something bad happens, I'm going to take the phone call. Have I run those numbers or have I at least told you about it? If I've told you about it and you don't do it, I sleep better at night. I don't feel bad. I don't feel guilty at all. If you don't do it, that's a different decision than doing the math.
Jason Pereira: Agreed. Agreed. We've done a pretty good job of covering the gamut here of need and basic coverage. The reality is that if your insurance agent is not speaking to you about basically living benefits, get someone who is going to because, frankly again, the statistics are you're actually far more likely to become disabled or to have a critical illness that you want to die at an early age, but we all absolutely see it while most of us see the need for life insurance, but the living benefits is a much bigger risk.
Jason Pereira: Brian, before we sign off, any last thoughts or any last words?
Brian Laundry: No. Actually, I think more than anything, I'm sitting here. I'm enjoying this conversation. I mean that maybe because I'm enthusiastic about what I do. I find I'm often the one being asked to stand in front of people and sell them this idea. It's very frustrating and time consuming and energy consuming.
Brian Laundry: This is enjoyable. This platform can be used to help tear down the walls for advisors and clients. I just think what you're doing is great. I'll participate [crosstalk 00:42:10].
Jason Pereira: Thank you. We did a good job. I think one of the things I do like about what we did was that we spent a lot of time not getting into product detail because, frankly, that's secondary. The broad strokes are the important part. It does in X in Y scenario, but really the why you need this, why it's important to you and your loved ones, how it's going to protect you and your family, that's the reason we do it.
Jason Pereira: The other stuff is just the how. Brian, before we sign off, where can people find you?
Brian Laundry: Just Google me. My name is Brian Laundry. Whenever I go to conferences, I just tell people to call me Laundry because it's easy to remember. You can Google me. My website brianlaundry.ca.. Yeah. I'm pretty easy to find.
Jason Pereira: Excellent. Well, thank you very much for taking the time.
Brian Laundry: Thank you.
Jason Pereira: That was this week's episode of Financial Planning for Canadian Business Owners. Thank you again for taking the time. I thank Brian for taking the time to come in and discuss two very, very important forms of coverage.
Jason Pereira: We did touch upon [inaudible 00:42:58] in this episode, but I am planning on bringing in somebody who is the definitive expert in this space. Keep an ear out for that one in the future.
Jason Pereira: As always, this is Financial Planning Canadian Business Owners. I'm your host,
Jason Pereira. Thank you and take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high net worth individuals, business owners and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple podcast, Stitcher, Google Play, and Spotify or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home subscribe for you.