Many individuals are confused by Life Insurance. People don’t understand if they need Life Insurance, how much they may need and what type of Life Insurance. The Life Insurance industry has not done itself any favours over the years by designing products which are not necessarily comparable despite their names and similar features. Added to the confusion is the delivery method of product. Some companies have captive agents which only sell their products, some brokers represent several companies and now with the advent of the internet, there is a plethora of products available on line. This article will take some of the mystery of Life Insurance and give you an idea of what your next steps should be in evaluating your needs and options.
Life insurance in its simplest terms comes in two forms, temporary and permanent. Within these two forms are a variety of permutations.
Temporary Life Insurance
Commonly known as term insurance, this insurance is your pure insurance. For a fee, your beneficiaries receive a benefit on your death. The term can be from one year to many. These plans are often offered through employer’s group benefit plans and are what most Canadians own. This insurance is generally your least expensive form of insurance.
Term insurance is used to cover a temporary need in the case of an unexpected death. Debts needing to be settled, children’s education needing to be funded and a surviving spouse’s needs to be provided for, are the most common reasons for temporary insurance. In addition, you often see businesses with term insurance where two or more partners are involved.
Premiums are generally guaranteed for the term you choose and usually are renewable at a higher rate without further medical evidence. Rates are determined based on gender, age, health and lifestyle. Prices are very competitive and vary significantly amongst different carriers. In some cases, it pays not to renew an existing policy as a new policy may be less expensive.
A good agent can help you determine your needs and amounts required. There are also many calculators available on-line to get you started.
Permanent Life Insurance
Permanent Life Insurance is used in retirement and estate planning. As the name suggests, the insurance is permanent and provided it is kept up to date, it will pay out on your death, be it premature or well into old age.
The primary objectives of permanent insurance are the following: ensure surviving spouse has sufficient funds to live after you are deceased, guarantee funds are left directly to beneficiaries on your death, charitable giving, cover estate taxes to maintain your estate for your beneficiaries and finally to use not only as an estate tool but also a retirement planning tool.
Permanent Life Insurance products are most frequently known as Whole Life, Universal Life or Term to 100. Whole Life and Universal Life policies have savings components while Term to 100 is pure insurance. Because of favourable tax treatment, savings components added onto life insurance products can have significant benefits either at death or at retirement. As a result, permanent insurance can be paid up in a few years or premiums maintained forever.
Whole life policies have a level pure cost of insurance throughout the plan. The costs of insurance and administrative costs are not disclosed to the buyer. The savings component of the plan is invested by the insurance company at their discretion and any income in the form of dividends will be paid out at the discretion of the company over and above any guaranteed return stated in the contract.
Universal Life is basically the transparent form of Whole Life. The pure cost of insurance and administrative costs are separated from the savings components. The investment decisions are made by the owner of the policy based on available options from the insurance company. The options generally range from low risk government guaranteed fixed income securities to products very similar to commonly available mutual funds.
Term to 100
This is your base permanent insurance without a savings component. Premiums are paid for life without any savings components.
Which Policy is For Me?
Everyone’s needs are different and every insurance provider’s products are different. It pays to discuss your family situation to determine these needs and then choose a product which fits those needs. Once you are aware of your needs and educated as to your options, a quality agent should be contacted. New and competitive products are coming out all the time. Certain insurance providers are competitive in certain markets, but not in others.