E33: Insurance 101 with Simon Kay

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Or in other words, we're talking insurance the Code of Hammurabi is a Babylonian law code dated from around 1750 BC. It consists of 282 laws dealing with all aspects of public life, citizens rights and obligations, and the Babylonian kingdom's justice system. The laws were inscribed on a stone stele in honor of the king Hammurabi and on a number of clay tablets. The stele, discovered in 1901 in the southeast of Iran, is today exposed at the Louvre in Paris. Written in cuneiform script and Akkadian language, it is one of the oldest deciphered writings of significant length in in the world. Several aspects of the code are remarkable. The law code is written to be accessible to the general population instead of in an opaque manner that would restrict its understanding to a small elite group. The code explicitly recognizes the principle of equality of people before the law. It contains perhaps the first declaration of human rights in history, which it says in quotes to cause justice to prevail in the land, that the strong may not oppress the weak. Several laws are explicitly designed to treat issues related to risk.

For example, some laws in the Code

of Hammurabi specify the professional responsibilities of builders and engineers. If an engineer or builder builds a house for someone and does not construct it properly, and the house falls in and kills its owner, then that engineer shall be put to death. If the house ruins goods, he shall

make compensation for them and shall re

erect the house at his own expense. This has the effect of aligning the incentives of the builder with those of the client, which amounts to a high likelihood that buildings are safe. These are laws that ensure decision makers have skin in the game. Some laws cover the risks of extreme events affecting a financial loan.

Some of the laws are viewed to

be the first recorded examples of the use of insurance, or at least the concept of insurance. If a merchant receives a loan to fund his shipment shipping by boat, he would pay the lender some money in compensation for the lender, providing a guarantee that he would cancel the loan if the shipment sank or was stolen. This concept carried over to ancient Rome. The Roman Empire in particular its large cities such as Rome, depended heavily on maritime trade. However, shipping was a hazardous activity with many boats lost to bad weather, technical failures and pirates. The Romans developed a maritime law that included insurance related concepts to allow shippers to share the risk of their activity with other investors. Indeed, the term risk does not derives from the Italian word risco, which means that which cuts and refers to reefs that could damage the hulls of cargo ships. For instance, a shipper could finance an expedition by setting up a loan backed by the ship hull. This is a class of loans called bottom rate. If the ship were lost at sea, the lenders would lose their money. If the ship arrived at port, the owner would repay the loan plus interest. Taking the same concept to the British Empire. In the late 1600s, the British were increasing the amount of shipping between England and the colonies. A London coffee house owned by Edward Lloyd became the main meeting place for merchants and investors to discuss insurance. Merchants would present a copy of the ship's cargo and investors willing to cover risk of loss would sign at the bottom of the document stating that they were prepared to assume a percentage of the risk.

This coffee house later became Lloyd's of

London, the world's specialist insurance and reinsurance market.

So there's the beginnings of insurance. A little bit of history for you today on the unlimited podcast. We're talking about the basics of insurance, what it is, different types including life, disability, critical illness and what you need to know. Insurance 101 with our guest, Simon K. Insurance specialist. Let's go. Welcome everybody to 2024 and our first recorded episode of the year. Aside from my quarterly letter, which I hope everyone read in early January. Really excited today to have Simon Kay with us. The topic is insurance 101. So I know everyone's been waiting for a few years since the podcast launched till the official insurance episode has dropped. It has dropped. Now, you know insurance is an interesting topic. It is very important. It can be complex. And I was able to bring here today Simon Kay, the president of IPS Insurance, who's going to give us the 101 lesson. So, quick intro to Simon. He is, as I say, president of ips, which is a specialized insurance advisory firm with a very unique private underwriting approach to determine insurability. And maybe he'll discuss that for a moment and why that's important. He is an insurance industry veteran, having started his insurance career back in 1988 as an insurance agent at London Life and really interesting for Me not. Not insurance wise. But more recently, Simon is a founding investor in something called Fairgrounds, which is a free to join racket club focusing on pickleball and Padel, which are some of the fastest growing sports in the world. And Simon took me out there to the courts a few weeks ago in, in the cold and taught me how to play this Padel game, which was pretty amazing. So we'll actually talk about that maybe at the end. But Simon, thank you very much for being available and going to teach us a thing or two about insurance.

It is always a pleasure to be on with someone who is excited about insurance. So that's we're off to a good start.

Who isn't excited about insurance. So you must always feel good then. So yeah, so today the goal is we want to just explain, let's call it a basic, but it'll be a little bit more than basic level. But what insurance is. You know, we're going to focus on insurance primarily for individuals and families as opposed to maybe businesses. And, you know, it's a broad topic, so we have to be mindful of time. In particular, I asked Simon to join us because he really has a knack for explaining complex subjects in a clear and articulate manner. So we're definitely going to put them to the test here. You would have heard at the beginning of the podcast a little bit of history of insurance. So I won't dive into too much there unless Simon wants to say anything on that. But I think the first important thing before we jump into what's insurance is, insurance serves a variety of purposes. At the most basic level, it touches on risk management. And so I don't know if, Simon, you want to describe sort of what this risk management means or if you want me to give a little bit more color there, but insurance doesn't come up unless there's a risk. Sorry, let me rephrase. Basic sort of level of insurance. We're going to actually go into insurance 201 or the second level of insurance, which has a whole bunch of other characteristics and benefits and uses. But for the purpose of this conversation, insurance is primarily around risk or risk management. So you want to address that a little bit, Simon, to lay the table, whatever that phrase is. Make the table. Lay the table. Do something with the table.

Yeah, I will lay it out here. So yes, exactly. You're exactly right. What we're going to do today, as you've asked me, is to really talk about Insurance 101. Insurance really is as complex as you want to make it but we have a tendency in this industry to make it way more complex than it needs to be. And for the purpose of today, I'm going to dumb it down. But at the same time, this is really all that the bulk of people are going to need to know to be pretty close to an expert, at least for their own, for their own, establishing their own where insurance fits with them. We tend to break out insurance into two broad categories. One is needs and the other is what we're going to call efficiencies. So needs are, and I like to position this in the context of actually, coincidentally, wealth management, where Brian, you have a plan, you say, I'm with a client and you have a plan. And it basically says, okay, Mr. Mrs. Client or whomever it is, we want to get you from here to there. And we want, and this is what the plan looks like and what insurance does on a needs basis. Really what that does is it says where are the areas that that plan may fall apart against your plans? Of course, you know, you become disabled, you become critically ill, you die. Those are the core areas around how we're going to establish needs. Because what we want to do is we have that lovely curve, hopefully that in the wealth management side you produce, that says we're going to get from here to here and the line goes up and then you start to retire and start to chip away at it. And what we don't want is for there to be an abrupt drop in that because an income has stopped or because expenses need to go to something, some unforeseen event. So the needs are within that context as a little teaser in terms of what 201 is going to look like. That's where we start getting into. It's not necessarily that you need it, your plan is established, but how can we incorporate some of the benefits of insurance to ensure that we conserve as much of that capital so that we are not giving any more to taxes than is absolutely necessary. And that's what we're going to call efficiencies. But that typically is put for someone who has surplus assets and their, their protection part. We never ever, ever compromise the protection component. So we would never jump to some fancy schmancy concept around tax planning until we have clearly established that, that we have sort of bulletproofed the wealth plan.

Right. Okay, perfect. That makes sense. That's a good sort of laying the groundwork for what the need is. I want to just circle back on risk management for one second when it comes to risk and everybody who goes through Their day to day takes on some level of risk. Unfortunately, I have to say Simon's already mentioned it, but while I think insurance is a wonderful topic, it does touch on, unfortunately, death, death, disability, critical illness. So, you know, apologies in advance and we're going to talk about some not so wonderful topics. But this is the risk management side of, you know, maybe taking care of some of that. So with risk, there's basically four things any human can do. If you, you know, want to think about risk, you can avoid it, you can reduce it, you can transfer it, or you can retain it. So if you want to go skydiving, you're retaining the risk, you're going to go and you're going to do it. Or you may want to avoid that because that's risky. You may want to reduce your likelihood of a big injury and decide, you know what, maybe I won't go skydiving today. And third one or on that list was something called transfer. You can't really transfer your skydiving experience. But you may say, I can't handle the risk of. Again, hopefully this never happens to people. Unfortunately it does. Big car accident and paying if there's problems, property damage or I can't handle the risk or my family can't, if I were to disappear or get disabled. And that's where we say, well, who can take on the financial risk of something bad happening? And that's the transfer. And I think that's where to summarize this whole diatribe here. That's where I think the insurance and insurance companies come in. You're essentially transferring your financial risk away from you and your family to someone else who's going to pay if something bad happens. So that's just the way I think about risk and agreed.

Yeah. So this really is about transferring the risk. We can self insure or we can insure. Right. Actually sort of plays into something we'll talk about maybe even shortly, just around whose financial interests are we, are we protecting? So you know, you jumping out of a plane and, and skydiving may have a financial impact on not only your spouse and your kids, but it could also have an impact on your business partner. And it can have an impact on, you know, any number of, you know, or even the business because you're a key person. So it has an impact beyond just, you know, maybe some of our more limited thoughts around where the risk lies.

Right, so great. So let's now go. You know, the simplest, most basic question. Maybe it's not the simplest actually. So what is Insurance, let's make, let's start with life insurance. That's probably the most prevalent or what people might think when you say insurance, what is it? And give a little bit of color there and then maybe we'll go into, well, we will go into, you know, types of insurance and you know, a whole bunch of different features around that.

Yeah, so we, we covered a bit of it. You know, insurance from, from a life insurance perspective is where you are transferring the, the financial risk, obviously the risk of the activity you're doing, you're taking on yourself, you're taking on the risk of life. But things happen. And what we want to do is ensure that we have transferred the financial risk so that in the event that something does happen, that we still continue to fulfill the obligations, if you will, that we've made most commonly. And let's again keep it simple for today. I have made an obligation to my family. I want to make sure, when they were young, I wanted to make sure that there was enough money to get my kids to a point where they were quote unquote off the payroll. So, you know, I want to make sure that there is an income stream coming in to cover that piece at least until some given future date. I chose age 25 when I knew or hoped that they were done with their schooling and they were sort of out on their own. But at the same time, even from a wealth management perspective, you know, my wife and I have certain wealth management goals and to the extent that I pass, not only did the expenses need to be paid, but I also need to make sure that the, there's a continued contribution to our wealth plan because quite frankly, the overall pot isn't that much less for her alone than it would be for the two of us together. So insurance is really identifying what the financial obligations are that you've made and finding a way to present value that number to, to ensure that those contributions to either expenses or savings or whatever are in fact made. And we typically do that. I know we're limiting this particular part to life insurance, but really it affects, it's a, we like to categorize it as sort of your family's needs. We want to look at your personal health needs and then beyond that, we want to look at your estate needs. And, and when we're sitting down with clients, we don't want to be presumptuous to assume that just because they are 60 odd years old and appear to be, to have a certain level of wealth that, that those subjects don't need to still be Discussed at a minimum, just to make sure that we check them off, to make sure that we've dealt with them. So, but insurance in really its simplest form has an owner. It's a contract between someone who owns this policy contract and an insurance company that may be the same. The owner may be the same as the insured person, it may not. It may be the same as the person paying the premium, it may not. The beneficiary is going to be again, someone that you want to make sure receives the money. If you want the money for your children, that doesn't mean you're necessarily going to make the kids the beneficiary because maybe they're too young. So it's about structuring these four components of owner payer, who is insured and who is the beneficiary in a logical way that makes sure that again, we're going to establish some sort of a scorecard. We want to make sure that all the checkboxes on that scorecard are checked off by the end of the project.

Perfect. And you mentioned the insurance company. So just as a quick diversion or really it's part of the discussion, I guess. What's the insurance company? Who are they, how are they, how are they providing this life insurance? How do they make money here? Everyone, unfortunately, I can tell you with certainty, the only thing I know with certainty, everyone's going to pass away, unfortunately. So the insurance companies are, you know, you take life insurance, you know, they may have to pay and by May, you know, we'll get into different types of insurance. But who are just as a high level, who are these insurance companies? How do they make, how do they figure out what to charge and how do they make money on these policy.

So, so the main insurers are the ones that are sort of become household names now. So you have the Canada Life, Sun Life, RBC Insurance, BMO Insurance, Equitable Manulife. There's actually very few. And you, you dated me when you said I went back to 1988 of being licensed. But if you can imagine back then when we would run quote surveys, for example, there were upwards of 5, 600 insurance companies in Canada. They've all been now absorbed and mergers and takeovers since then, that it really the market is pretty small in the sense of the number of insurers. What they're doing essentially is they're looking at some tombstone data of what your gender, your age, your smoking status and of course the product and the amount that you are applying for. And they have established they've established a rate. Now that rate is based on a certain health profile. So believe it or not, we've had clients in the past go, why do they need to know what my health history is? And you can imagine that what an insurance company wants to know is whether that rate set by the actuaries is the right rate for you. So it's not as easy. And this is a really important for your listenership to understand that the impact of comparing, just as an example, a Manulife and a Canada Life and a Sun Life and saying, well, who has the best rate is far less material because the difference between those companies in terms of rate might be 1 or 2 or 3%, very, very small. Whereas if you are rated where there's something in your health history or your lifestyle, meaning maybe you, you're a personal pilot, maybe you are, you race cars from time to time, maybe you have a bunch of speeding tickets, maybe to your earlier example, you skydive. Those lifestyle issues will have an impact, as you can imagine, on the risk that you are transferring to the insurance company. Your health, if you have family health history, those will have a far greater impact. And this is where it becomes a little bit of a black box because we don't know which underwriter at which insurance company necessarily will see you in the greatest, in the clearest light, in the most favorable light for you. So what the insurance company is essentially doing is they're setting a rate. They are saying that if you die before then, excuse the expression, but you win. If you die after then, then the insurance company is held on to your premium for a longer period of time. So they win. And, but of course, you can imagine that would be like going on a sports betting site where you got one bet. What they've done to spread that risk is they have obviously hundreds of thousands, if not millions of policies in that pool. And as a result, the impact of you dying, quote, unquote, earlier or later than the actuary thought, has far less impact on the overall portfolio. Because they have millions of you in this portfolio. What we don't see is behind the scenes, a Sun Life, a manual life and so on, are not taking on all the risk. So if, for example, Brian, you buy a million dollar policy, the insurance company might only keep $200,000 of that risk and they're handing off the other 800,000 to what's called a reinsurer. You never see who those guys are, but again, you're further spreading the risk. So that because we have very, very strict rules in Canada, far more strict than the US or actually, quite frankly, a lot of the rest of the world. As you can imagine, we're a pretty conservative bunch here in Canada. So as a result we have a lot of regulation around ensuring that that risk is spread so that things like deaths due to Covid or you know, a pandemic or even, you know, something else that will put stress on the book. A business is minimal, so they are really spreading out the risk. So the insurers that you see on the front line are really, they're not taking on all the risks. So a lot of people can really feel very safe in knowing that it's highly regulated, reserves are put aside, but they're, they're on the front page of the contract in terms of who's insuring you.

Right. And when I was asking you the question, I sort of caught myself because I said, well, everyone's going to die, unfortunately. So, you know, you know, the insurance

is going to pay.

But then I said, well, maybe not actually, because I guess what I wanted to get into was different types of insurance, the two main types, and I think I would call it sort of buying versus renting or what we'd call permanent versus term insurance. And in term insurance it's actually, you'll tell me or us, I suspect most of the time the insurer never has to pay the death benefit with a term insurance. And maybe our listeners are wondering what the heck I'm talking about. So can you just explain the two different. And again, we're simplifying it here, but two different types of insurance and what they mean and what they look like and what maybe the core features of each would be.

At the core, there's two products. One product is called term and the other product is called permanent in the term category. And the sort of, the name speaks for itself. It's, it is designed to insure you for a given term. That term could be 5 years, 10 years, 20 years and so on. And, and it's designed typically for, or at least originally it was designed for very specific uses. So for example, I have a 20 year mortgage for $1 million. So I want to make sure that in the event that I die in that 20 years that my mortgage is covered. Great. So that is the term. Chances are, to your point, that you will hopefully live way beyond the 20 years in which case you've paid into this policy for 20 years, you then cancel it. The insurance company was on risk, you didn't die in that period. So they take all that money in and don't have to pay anything out and their obligation is now over. So term again term 10 term, 20, term 30. They, you know, this is the, you call it the rent, I call it the if insurance versus the when insurance. So if you die in the term, you will claim the rates because as you can imagine, the risk is so much lower that you will die in that period of time that as a result the rate is significantly lower than life insurance or permanent insurance would be. Well, I'll sort of jump to. Actually, let's go to, to expiry. The other thing about it is that even if you were to buy a 10 year term and let's say you're 35 years old and starting a family, the 10 year term at the end of the first 10 years will enable you to renew it without any medicals, without any questions asked, quite frankly, for another 10 years and then another 10 years and another 10 years and then eventually it will expire on a mandatory basis. That's typically around about age 80, 85. But actuarially speaking, it is, it will expire. Excuse the dumb insurance joke, but it will expire before you do. It is a. There's very high risk because there's a lot of insurance on for very little premium. But they've obviously calculated that risk and know that they're not going to be paying out very many claims. So what if you want life insurance to go on and on and on forever, but that renewal rate is becoming so exponentially more expensive, why else might someone buy term insurance? And one of the cool features is that by going through that underwriting and medical process at let's say age 35 and you have a 10 year term, I can actually do what's called convert, which means I can change it from the term insurance into this permanent life insurance product without doing any medical. So even if my health changes dramatically between age 35 and 45 on a no questions asked basis, I can change that insurance into quote unquote, the better. What we're going to call the when insurance, it doesn't pay if you die, it pays when you die regardless, so long as you pay premiums. So within the permanent insurance categories, we had the term within the permanent category. We really have again, to keep it simple, there's two products. There's universal life and there's whole life. Universal life on the surface is very transparent product. There's an insurance cost and there's a rate for that and you're going to pay that rate basically whether it's within the policy or without. We can go into that another time, but you're going to pay for that rate for life. But you can pay more than that premium. Have it go into what's called a segregated fund or some sort of guaranteed vehicle, have it grow on a tax shelter basis. You could even use that premium to stop paying premiums, the actual life insurance component, and pay for those insurance premiums with all this cash that you've accumulated. The benefit of that is that that cash is accumulating without any tax. And if you use that premium within the policy to pay for the premiums, you, you're essentially paying for your future premiums with tax free gains. So it's a real advantage instead of paying for it constantly without a pocket. And again, that insurance, the rate doesn't change as it would have with term. It goes for life. And no matter how long you live, so long as those premiums are paid, it will pay out the death benefit. These are what's used for estate planning purposes. Something that you need to know that there's a triggering event when you die as opposed to if you die.

So if, if we just quickly compare and contrast that the term versus the universal life permanent insurance, a term insurance, the term 10 would have a premium of X, whatever X is. And then at time of renewal, what multiple of X? This assumes you just keep rolling into the next 10 year terms of this original policy, which by the way, almost no one would do unless they have to for a whole variety of reasons. Because Simon's going to tell us it gets very expensive. But just to give a sense, so after the first 10 years, what does it go up if you don't sort of redo it, get rechecked for your health.

So let me, I'll geek out here for a moment, a little bit of insurance technical stuff, but that renewal, the assumption is that because they are offering that insurance to that 35 year old who is now 45 without any medicals whatsoever, and excuse the expression, but that person could literally be on their deathbed and they have to contractually offer that insurance. Yeah, what they're really doing is saying what we want people to do is promote people going through underwriting again and buy a fresh new 10 years. So anyone that is healthy is probably going to go through that process with their advisor. If they're not willing to go through that process with their advisor, it's probably because they don't think that they would qualify for insurance. So as a result, there is an extra load of insurance built into that renewal rate. So while that 10 year term at age 35 is X. Let's say it's 100 bucks at age 35. At age 45 it might be 4 or 5X, whereas so, so that same million dollars might now be 4 or $500 a month instead of $100 a month. By contrast, if they were to buy a brand new 10 year term and go through underwriting, that 100 might only be 1 75. So there's, we want to have our clients who do want to use insurance and we know that they're going to want to continue it. Really, it's really prudent that we get in front of them in year six or year seven and start the planning process, refresh that term before quite frankly they don't qualify from a health perspective and we can avoid that significant increase in premium. The universal life, on the other hand, in its simplest form, let's say you didn't put anything into the side fund. Instead of it being 100, going to 500, going to 1500 and so on, it might be $400 day one and you that pre. Never changes for life, right?

And for life means you're paying till what age?

Literally it's a contractual obligation that says to the insurance company, if I pay X will you cover me for Y? And the insurance company saying yes, so long as you pay X, we will always cover you for Y. Stop paying X, we'll stop covering you for Y.

Right.

So, so we want to typically promote people putting in a little bit extra so that if you know, they move or the address has changed and they don't see the renewal, that it doesn't automatically lapse. So there actually is some buffer in there to make sure the premiums will continue to be paid. But again, that's a little bit of a planning issue to reduce the risk of this risk management product. If I can jump into the whole life is a little bit of a combination of that insurance plus the savings, if you will, the optional savings, where it's more of a forced savings, if you will. This is called participating insurance or whole life where they are telling you the aggregate rate, which will then buy not only the insurance, but it will also sort of create a mandatory, if you will, cash value. And that cash value can be used for any number of things. It either grows the death benefit. So maybe you started at a million at age 35, but by life expectancy that million has grown to 2.6 million, for example, because you're essentially using that cash value to increase the overall volume of insurance. And once cash Value is sort of granted, it's vested. So again a different product, very unique. It's designed for the person that does in fact want to potentially augment their wealth. Plan just the fixed income portion. This is not intended to replace your equities and your funds, but maybe your, your fixed income where after tax you're getting, you know, 50% less than the rate. Well this is a great way to have these sheltered gains at just a little bit more than what the prevailing rate would be in a typical investment.

Right. And so that whole life that you've just described, that's the second type of permanent insurance. Correct. And then you touched just on tax for a moment there. Maybe just refresh us, what's the tax benefit of insurance in particular? Well, sorry, first of all, maybe let's go again all the way back to basics. Whether it's a term policy or a permanent policy of either type, at some point let's assume the person dies and the insurance company pays out a million dollars. How much tax does the person have to pay on that million dollars that they just got?

Right. On a personal basis it's tax free. Again, one of the huge benefits. And I like to, you know, when we start talking about performance and we look at the rate of return at any given age, if I put in X premium and a million dollars comes out at age 83, well there's an inherent rate of return and we look at that and, and we look at the pre tax equivalent. So in order to get that net death benefit, what would the rate of return needed to be in a traditional investment that's being taxed? And I like to show that it's not only, let's say performing it double digit returns over a lifetime, but that's not because they're doing have some magical potion in terms of how they're investing. If we saw something that was virtually no risk or risk of a fixed income that was performing at 15, 16%, we would say hang on a second, something's not right here. What's too good to be true? The reason it's performing at that level or equivalent level is because you're paying X premium on term. For example, when that death benefit comes out, it is entirely tax free. So and it goes directly to the beneficiary, so it's not even going through probate. So very, very powerful. Not because they're doing some sort of rocket science, it's because it has a tax advantage over a traditional investment. With the permanent products, the universal life and the whole life, same thing is Happening only we're adding one thing. You're paying for it with after tax, personal dollars. The growth within the policy is tax free unless you collapse the policy, of course, and the death benefit is tax free. So now you're getting on those products, you're getting two advantages, not just the death benefit being tax free, but even the growth is tax free. Again, I'll save this for, for the 201. But then if you are someone with a holding company, some sort of corporation, which is a significant number of people in, in, in Canada, where we've been built largely on the small business, now you have an additional advantage. Not only do you have, can you pay for it with corporate retained earnings. So corporate after tax dollars as opposed to personal after tax dollars. So that's advantage number one. So you get the tax benefit of how you're paying for it. You get the tax benefit that it's growing tax free. You get the tax benefit that the death benefit goes to the corporation entirely tax free. And if you live to full life expectancy, the actuaries and this rule around the capital dividend account essentially allows you to take all of that tax free benefit out to the estate. Even so, massive value in terms of, you know, use of that $1 of corporate dollars if your goal is, is retaining that capital and ensuring that you pay, you minimize tax and as much of that goes to your family, your beneficiaries as possible.

Right, so that's, that's the, the teaser for, for next episode where, or the next insurance episode where we're going to dive into all of that. So I think, look, I think that's a great overview of term permanent. It's basic, but there is still some complication obviously here. Let's just boil it down just really quickly. You've just explained the difference. If I'm, if I'm, I am listening of course to what you're saying, I would say, oh well, let's just get permanent in some way because ultimately it may be, you know, it's not going to go up in price every 10 years and this and that or maybe the growth of the port of the growth component of the growth of that investment component inside is going to maybe pay for some of the premiums. So this is all amazing. Forget this whole term thing. But many, many, many, many people have a need for term insurance. Could we just recap this sort of section on life insurance with why and when and who would buy term insurance and then why and when and who would buy permanent? And of course you can have both which, you know, I personally have and I don't know what you have, but that might be a good way to summarize life insurance and helping people figure out, well, do I have this? Do I need this? And maybe am I missing something?

Yeah, so great, great question. So let's just go back a minute just to recap. So we have two types of insurance. On the life side we have term and we have permanent. Term is for a term, it typically does not pay out, but it has that feature that you can change it into the permanent at a future date without doing medicals. The permanent obviously has far greater benefit because it's, it's essentially an asset, is not something that's going to expire. It does have value, it's going to pay out. So yes, a lot of people will go, well, why would I look at term insurance? I don't necessarily believe that it's like car insurance, I'm throwing my money away. Here's the thing. So, and let's maybe use an example. We'll use that 35 year old who's, who's just had kids or let's say they have a twin 5 year olds. I'm going to, I'll make it the numbers a little bit. Twin 5 year olds and they're just getting around mom and dad to, to talking about insurance and the person makes, and again I'm going to make this really easy. The person makes $100,000 after tax a year and essentially it's saying, well listen, I use all of my paycheck goes towards something. So I want to make sure that we've had the conversation and we want to make sure that that insurance lasts until the kids are 25 and quote unquote, hopefully off the payroll from their perspective. So that's 20 years at $100,000 after tax. So you know, we're looking at a couple million dollars of insurance. So a couple million dollars of term insurance at that age might only cost 2, $3,000 a year. Understanding that 2 million of whole life, 2 million of universal life, 2 million of term 10, 2 million of term 20. If you died tomorrow, they all paid 2 million. It's really important to understand that. So there's not like one product is better today. They are only better years and years and years from now. What we do not want to compromise is that need. So for example, if you could only afford $5,000 a year in premiums, but that $2 million of whole life was going to cost you. And again, the numbers may be way up, but that $2 million might cost you $10,000 a year. I don't have $10,000 a year to spend on this or the 35 year old doesn't. We do not want to compromise the 2 million that we need. So that means we need to do it all in term insurance to make sure that the kids are covered so that we transfer the risk so that our obligations to our family are covered. That's a deal breaker. We don't compromise those rules because again, we want to make sure that the family is safe and secure and we want to make sure that wealth plan stays aligned. We don't want to say I don't like term insurance. I'd rather buy, let's say $500,000 of whole life because that's all I can afford. Well now again, something happens to you tomorrow, the family's only getting 500,000, but they needed 2 million.

Right.

So term can be incredibly valuable because what it does is it enables you to buy the right amount to hopefully fit it into your budget. And as time goes on and you have more free cash, we can start to slowly convert portions of that $2 million over to the product that you actually want.

Right?

Yeah.

Look, I think of it as, you know, that's why I say rent versus buy when you're 35 or when you're 25 or 30, whatever it is. Typically it's when you have a kid is when the insurance need really pops up. You're generally, you know, you're a few years into your first job, you're generally not running out the second you got your child is born and buying yourself. In this country, housing prices are getting very expensive. You're not going out and buying yourself, you know, a million or million two or million three, whatever the average cost of a house is because you can't afford to probably do that and own that asset at that moment forever. But you are likely renting accommodations somewhere. I think you've described it well, at age 35 you need 2 million. You probably can't afford to buy the investment in the permanent, so you rent it for a number of years until you can afford the higher the investment, the lifelong insurance. Or you rent it for 20 years and you may not need it after that, so maybe don't pay for it.

So think of it as almost think of it as your landlord has given the given you the option to buy that house in the future. If you really, really like it, you can buy it. And he's not going to put it on the market. So we're going to make it really easy for you to go from a rent to an ownership, but you still need somewhere to live. So we don't want to compromise your living arrangements. We could probably take this metaphor pretty far, but, but I think you get it. Like we don't want to. And it's, it's, it's a bit, you know, unfortunately, there are people who will buy a lesser amount in favor of product. And you know what? I was going to say they have my blessing, but in fact, no, I'm a firm believer in needs, salvaging needs first. We can deal with the efficiencies at a future time. I just want to make sure that we create an appropriate back door to make it easy for you to transition in that direction but not compromise your family or your business partnership or whatever the case is or your covering of a loan. We don't want to compromise that and put anyone in a bad position should you die.

Right, okay, good. Well, I want to shift gears a little bit, you know, with life insurance or, sorry, with life, as I mentioned, you know, I know, and every listener knows you're 100% going to die at some point. And that is a sad thing, but that's, that, that's life, life, death. And so, you know, you buy, you're really buying life insurance in the early days to cover off a risk and permanent is probably for down the road to cover off some tax or liabilities, et cetera. But most of the time you're living, you know, hopefully you live a very long life and you're working and you have to pay for things and this and that. So there's, there are two other types of general insurance I want to talk about the first being disability insurance. And my understanding based on research is 1 in 4 individuals or workers will become disabled for at least some portion of time during their working years. But I'm going to guess that 100% of workers really want their income to continue because they have to pay for all their living expenses and whatnot. Can you talk about disability insurance really, you know, at a high level, again, high level. What is it? Why is it important?

So disability insurance is what we call a living benefit and meaning that it's going to pay while you're living. Same concept though. We want to make sure that, like that in the event that your income stops, that we are going to replace at least, at least a portion of it. So we commonly say, like let's say I have a, a professional as a client, you know, a doctor, a dentist, Just, just to name one or two. And we say, listen, your job is to do your job right? That's your job. So, but what, what do we do if you can't do your. You can't do that job. And it is one of those things. The same ways if you have a car, you have to get insurance. We actually sort of say, listen, I hate to say it, it's one of those things. We just have to suck it up. But we need to fireproof, if you will, your income. So what we want to do is replace that income. And there are various definitions of disability, and this is where it gets a little bit more complex. But we want to make sure that in the event that they can't do their job, keep it simple, that we're going to replace a portion of their income. And typically what we want to do is have people get as much insurance as is available, because the insurance company is going to cap that number. What they're doing with the maximum amount of benefit that they will offer you is they're always trying to give you an incentive to want to go back to work. So if, for example, you are making again, $100,000 a year after tax, the maximum benefit that they might give you might only be $80,000 after tax. They want you to be incented to get back to the hundred. So they will never, almost never insure you for your full income, because we've seen it before, it just becomes too easy to stay at home. So they don't offer benefits in that way. Now you mentioned, again, I'm going to geek out a little bit here, but you mentioned the one in four will become disabled. That number actually, statistically is very true. The question is, how long are those people disabled for? And it's a very important variable. And I'm not diminishing the risk because the risk is real. And more and more people are becoming disabled these days, sadly. We've got a lot of mental health disabilities, we got a lot of soft tissue injuries. People are more active than they were 30, 40 years ago. So injuries are happening now. Disability insurance has what's built in this thing called a waiting period. And the rate is going to be directly correlated to that. So yes, one in four might become disabled, but they might be only off for three months. So statistically speaking, those odds get a lot smaller for being off for a longer period of time. So if what we can do and what we commonly do is say we want to get the most benefit that they can get on the market, and then we also Want to make the waiting period, the amount of time you must be disabled before the claim starts to be as long as possible. So put aside an emergency fund because the rate for a 30 day waiting period is significantly higher than the rate for a 90 day waiting period. So we will commonly tell our clients if you can have three months set aside, we can charge you a lot less premium.

Right? Yeah. So I don't think we're not going to dive super deep into disability and the next type of insurance. But I think the biggest takeaway from this, I hope, and this is my philosophy as well, you know, with, with the life insurance Simon just discussed, you figure out the needs analysis and you really, you know, figure out what you would need and how much coverage you want. You don't, you don't really need to get more life insurance than you actually need. But certainly getting less is a, is a problem with disability. I think the key is you want to get as much as you can when you're disabled. Not only do you probably have to pay for your regular life expenses, you might actually have to pay for a whole bunch of other expenses that wouldn't otherwise had. So that should be in my view the key takeaway on this.

Yeah, and I know the next, you know, the other living benefit which we've talked about is critical illness. And critical illness is not correlated to income. It's really does it, you know, you can be disabled for a whole number of reasons. Critical illness has taken up the bulk of those reasons, like the, the top reasons why people become disabled and basically said to the extent that you are diagnosed with any one of these diseases or ailments that's listed in the contract, we will just pay you a lump sum done. It's just based on diagnosis. So what a lot of people will do with critical illness is that they will say to your point, I'm disabled, I've got expenses, but my spouse is going to need to take some time off work to help me out. So sometimes that lump sum that comes from a critical illness policy affords a person or clients the opportunity to for example, go for expedited health care to pay for someone to help them out with the day to day of life to allow for a spouse or partner to be able to take some less time, you know, lessen their income because they need to now help you. So I mean, I know, lovely subject, but that's what, what critical illness is used for and also for self employed people where maybe their income because of write offs and whatnot is not an accurate Reflection of what they actually spend. If their income only allows them to get X, but they're living a significantly higher lifestyle. Commonly a self employed person will augment their disability insurance with some critical illness to make sure that not only do I have six or seven or eight or $10,000 coming in a month, which is less than I'm used to, but I'm also going to get another couple hundred thousand dollars to help me sort of weather the storm and get used to this new lifestyle.

Right. And just so folks understand definition of a critical illness or examples, they are

the top ones that sort of COVID off probably 90% of the claims is, you know, heart attack, stroke, cancer, those types of things. I know, lovely subject, but there's loss of independence, there's Alzheimer's, there's part, there's all kinds of things that are sort of built into that, but it's the core ones that you would think would sideline you.

Okay, got it. So we've covered life insurance, disability, critical illness. Some listeners here probably are lucky enough to have be employed with an employer that provides a whole bunch of benefits, health benefits that might include life, disability and or critical illness all as part of their employment package. Should folks that have that, you know, enjoy this podcast and go that's awesome, but I got it at my employer, I'm all good, you know, I don't need to worry or what do you recommend for folks that may have some of this coverage already?

That's one of the most common reasons for non starters of insurance conversations is people go, well I have group insurance. There's a couple of thoughts. In the old days and I'm going back a ways when people had one job their whole life and they had benefits. I think I could probably say okay, maybe that makes sense to a certain extent because the benefits stay with the company. So nowadays though, people are moving maybe five years, 10 years, they're moving to another job. What if that new job doesn't have a great benefit plan? What if they don't have a benefit plan at all? What if you decide to go self employed? What if the medical plan requires that you do provide medical evidence in order to get to the insurance? You've added risk to your ability to get the insurance. So while I love that employers are providing this, I want people to understand that it is in fact exactly what it's called, which is a benefit. In a perfect world. In a perfect world, we want to own our own insurance. The part that basically says if I'm going to get into a wealth management Plan and I'm going to build a roadmap to retirement and beyond and succession plan. I'm going to also take control as a distance needed to play in that game. I'm going to fireproof my own wealth plan with my own products. That way I remove any of that risk. There. There are few problems with group insurance and again, I love it. I think it's great and it is a benefit, but you don't own it, so you may lose it. If you lose, leave the company. Company goes under. Whatever the case is, number two is that the amount may be nowhere near what you need. So if you're getting one time salary for life insurance, we just use an example where we had 20 times to cover off until the kids are off the payroll. So it may not be sufficient. Disability has a definition that says in the event you can't perform the duties of your own job, we'll pay you, but only for two years. After the end of two years, it reverts to something called any occupation, which means you can't do any occupation. That's the only way that you're going to get paid if you're literally unable to work anywhere. So by doing it individually and own, you're taking control, you're getting the right amount, you're getting the right definitions and you're fireproofing your life, your financial life appropriately so that really, at the end of the day, I don't expect any of my clients to remember exactly what we did. I just want them to put their head down on their pillow at night and go. I can't remember exactly what Simon said, but I know that I'm covered. I know that I fireproofed my wealth plan.

There is a joke somewhere there with Simon says, but I won't go there. I want to thank you for giving us and helping me, helping me and us go through this overview of insurance. Before we go, I do want to talk about maybe it's a plug, maybe it's not, but talk about fairgrounds because, you know, I'm a big tennis player and fan. Not a good tennis player. A big tennis player and fan. Pickleball is obviously exploding. I do have a pickleball court in my backyard because, you know, we retrofitted that during COVID but mostly I play tennis. But I was so intrigued by this padel and I hope I'm pronouncing that right. And then, you know, you took me out and the ball's bouncing off all the walls. It's like squash and tennis and pickleball. It's all stuff rolled into one and this is really exciting. So can you talk just tell people what this fairgrounds is and what, what it's all about? Sure.

So I was approached by a couple of really great out of the box thinkers that saw the explosion of this sport. They knew I was the guy with my history. I've been very involved at an organizational level, community level, junior level, even a charitable level with all racket sports. And I just saw pickleball was just, it caught my attention because I've never come across in all my years a sport that has got more people moving and active than pickleball. It's so accessible. It really is quite a remarkable game that has been around since the 60s but for some weird reason all of a sudden took off and has become addictive and almost like a cult following and I'm sure will for quite a quite some time to come. We, we took on this opportunity to basically like I grew up not in the, the club world of, of tennis and as a result I really didn't play a lot of racket sports till I was older. And then I got into the club system and realized that especially in Toronto with real estate as it is and so on, it's really hard to find a court. It's really expensive to join a club. And the monthlies, the equipment, like it's really not very accessible. And we figured out a way to put pickleball courts and I, I know it's spelled, if you sound it out it sounds like Padel, but where it is paddle P A, D E, L. But it's paddle, look it up online, look it on YouTube. It's absolutely incredible. So we've taken on these two sports where the membership is free. You just need to sign up to sign the waiver so that you can then pay as you play or the rates are really, really reasonable. The intention is to have community to get people moving. You can usually in our locations you can get some food, you can get a beer, you can enjoy some time with some people. You can do clinics, you can do house leagues in both of those two sports. Pickleball fastest growing in North America. Paddle fastest growing actually around the world, mostly in Europe and in South America. And we've now, I think we're opening about seven clubs right now coast to coast. We're opening in, in malls in some of the bigger big box retail spaces. So yeah, really, really exciting. My only plug would be if you want to check it out, you can go to visit fairgrounds.com and sign up and go get a court. And if you are listening to this and you want to hit with me and Brian, then give us a buzz and we'll take you out and play some paddle.

Absolutely, absolutely. The thing I found the most interesting just, just because it's just I love people who think out of the box. The first time I, I saw one of your group of courts was just I was driving down Yonge street and there was what appeared to be a building that had been torn down. And then a few weeks seemingly later, there's all these pickleball courts there. And then I played with you out somewhere where there's another building that's a whole development under construction and you guys put pickleball and paddle courts all over there. And so it's using, I guess, land that would otherwise be vacant for a period of time until development starts or building starts. And I just thought that was amazing.

Yeah. So this is, I wish I could take credit for the idea. My brilliant partners again with their out of the box thinking basically said, well, the only urban centers are, you know, are going to be in schoolyards or local neighborhood tennis courts. And we know there's been some backlash around the sound and whatnot. And so what we figured we would do again, me piggybacking on these guys, they figured, well, we got all these construction sites and as we know right across the country buildings are going up like crazy. Why does it need to sit as a empty dirt pit for three or four years until they build? So essentially we're doing pop ups where we will take over and animate their space. They look like a great corporate citizen. They're doing their part for the neighborhood. It's not going to be an eyesore. The neighborhood gets to, to be active during that time and then when the building goes up, the building goes up and. And we are able to basically pick up almost everything other than the paint on the ground for the courts and recycle it into the next location. So it really is an incredible use of space. And I think you're referring to Young and Eglinton in, you know, there were upwards of 5,000 members there, if you can believe it, in probably four months. So clearly the sport is just. People are itching for it. It's so great. And like I say, if any of your listenership want to play, just give us a call. You and I will get out there, right?

You got it.

100%.

Okay, last question and then we're done here for. I appreciate your time. My listeners know I'm going to ask this. Maybe you do, maybe you don't. So our theme at Gensler wealth is or our tagline is your wealth Unlimited. Simon and I have done work together. Simon's very familiar with what we do here, but we're looking to help families in any way they need. On the financial side, we are not limited by other corporate rules and this and that. We just, Our goal is to just find and do whatever's best for the client, finding, meaning professionals, meaning investments, etc. And so I always like to ask our guests at the end of the podcast, you know, the world is. Is your oyster, it's unlimited. You could be doing anything. You could have chosen to do other things. You could still do anything you want if you weren't Simon Kay, the president of IPS Insurance and pickleball and paddle player extraordinaire. What might you have done or be doing?

Wow, that is an incredible question, which I am not prepared for. Listen, I'm, I'm a bit of a why not Kind of guy that we have a lot of rules and a lot of pressure in our society for this lovely white picket fence life. And I bought into certain elements of it. And you know what? I think I would just be doing a lot of playing. So I've done a lot of things early on in my life and not waited. You know, the pickleball again. It's a lifestyle. I live part of the year down in Bahamas. I just love it down here. Taking up kite surfing. There's a lot of good that we've done that I wish I could do more of, where we would do sports and homework for less fortunate, figure out ways to get them into universities, get educated. I think sports is just such an unbelievable way of teaching people what they're capable of, what their limits are, that their limits are way bigger than they think that they are. And if, if money was no object, I would probably dedicate my life to doing a lot of that. Helping kids in school, helping kids in sport. I think they work so great together. I wish more people could do it.

Amazing.

Well, that's a wonderful and very nice answer. So listen, Simon, thank you so much, everyone. Remember what Simon says and focus on insurance needs analysis for life insurance. Get as much disability insurance as you can and make sure you have your own insurance, not only your group insurance. Thank you for your time very, very much. And yeah, we'll see you. We'll see you on the courts. Thank you.

You bet. All the best. Thanks, Brian.

The unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. This podcast is not to be taken as investment advice. For the full article on the history of insurance and risk, please see our show notes or go to riskengineering.org and search for the article by Eric Marsden. If you like what you heard, don't forget to rate the podcast and follow us on social media inthewell. Thanks for listening and see you next time.

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