Essentially, it’s a means of spreading financial risk among a large number of people who pay into a fund or pool. In this way, the cost is minimized for those who suffer an unexpected misfortune. Life insurance is a way to protect your survivors and dependents against financial hardship. A life insurance contract or policy is a legal agreement between you and an insurance company that guarantees payment of the face value of the policy, upon death.
How do you figure out how much life insurance you need? A ballpark measure sometimes used is between five and seven times current net income. But to work out the specifics of your own situation, you'll want a financial needs analysis. It gives you a picture of the capital your survivors need when you die. It looks at assets that would be available to them, liabilities they would have to deal with, and continuing family needs for income. A qualified life insurance agent can help you work out a more comprehensive financial needs analysis.
- If you are in a personal partnership (usually marriage), how much do you contribute to the family budget? If you were to die prematurely, how would your survivor(s) get by, especially dependent children?
- Does anyone else depend on you financially, such as a parent, grandparent, brother or sister?
- If you are a single parent, what level of support payments are you making or getting? How would these be kept up in the event of the contributor’s death?
- If you have a mortgage on your home, do you want it paid off in the event of your death?
- If you have children, do you want to put aside money to complete their education in the event of your death?
- Are there any other family members or organizations to whom you would like to leave money?
- Could life insurance play a role in business or farm succession plans?
- Could life insurance play a role in paying the taxes incurred when capital property is transferred from one generation to the next?
What Different Policies Will Do for YouThough it seems there is a bewildering array of policy types and names, they all boil down to two basic forms of life insurance: permanent and term. As a rule, permanent needs should be covered with permanent insurance, temporary needs with term insurance. Often, a combination of policy types does the best job for you. So, what is a temporary need? A mortgage; high needs for continuing income when your children are young; some business obligations; and so on.
Permanent needs? Funeral expenses; supplementing a survivor’s income; covering capital gains taxes at death, especially if family property is to be passed on to the next generation; and children who remain dependent for their lifetimes, often due to a disability.
PERMANENT LIFE INSURANCE
Permanent life insurance has several variations: whole life, universal life, variable life. All are designed to provide insurance protection for your entire lifetime, as long as you keep the policy in force.
Variations of permanent insurance
Although every permanent insurance policy is designed to provide you with coverage for your entire life, the guarantees vary in different policies. This, in turn, affects the premium you pay.
- Whole life: This is the traditional policy that fully guarantees the level of premiums you pay, the death benefit and the growing cash values within the policy.
- Universal Life: It consists of two parts: life insurance and an investment account. You decide what to do with each part of the policy, and you can increase or decrease your premiums and your death benefit, within certain limitations. Earnings on the investment account may or may not be guaranteed, depending on the type of investment chosen.
TERM LIFE INSURANCE
Term policies provide insurance coverage for a specified period (e.g., a fixed number of years, or to a set age) and then expire. A death benefit is paid only if you die during the term of the policy.
Variations of term insurance
- Term policies are commonly available for terms of 1, 5, 10 or 20 years, or to age 60 or age 65. The premiums usually remain level during the specified term but increase if that term is renewed (e.g., premiums would increase every five years on a five-year renewable term policy). Most term policies are non-participating and do not include cash values or other non-forfeiture values. Hence, premium costs are lower than for permanent policies — at least when you’re younger.
- Term to 100
Often categorized as a permanent plan, term to 100 policies provide life insurance coverage through to age 100. Usually they don’t pay dividends or include cash values, though some may provide other non-forfeiture values. Accordingly, premiums are lower than for traditional whole life policies.
- Renewable and convertible term insurance
Renewable means that you can renew your policy at the end of its term, for a higher premium, without submitting medical or other evidence of insurability. (Once you’ve reached the age of 70 or so, the policy may not be renewable.) Convertible means that you have the option of exchanging your policy for a permanent insurance policy, without submitting evidence of insurability.
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Permanent |
T100 |
Term |
ADVANTAGES |
Provides protection for your entire lifetime – if kept in force. |
Provides protection to age 100 — if kept in force. |
Suitable for short term insurance needs, or specific liabilities like a mortgage. |
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Premium cost usually stays level, regardless of age or health problems. |
Premium cost usually stays level, regardless of age or health problems. |
Provides more immediate protection because, initially, it is less expensive than permanent insurance. |
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Has cash values that can be borrowed, used to continue protection if premiums are missed, or withdrawn if the policy is no longer required. |
Premium cost is lower relative to traditional permanent plans |
Can be converted to permanent insurance without medical evidence (if it has a convertibility option), often up to ages 65 or 70. |
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Other non-forfeiture options allow the policyholder various possibilities of continuing coverage if premiums are missed or discontinued. |
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If the policy is participating, it receives dividends that can be taken in cash, left to accumulate at interest, or used to purchase additional insurance. |
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Permanent |
T100 |
Term |
DISADVANTAGES |
Initial cost may be too high for a sufficient amount of protection for your current needs. |
Usually no cash values and no or limited non-forfeiture values. |
If renewed, premiums increase with age and at some point higher premium costs may make it difficult or impossible to continue coverage. |
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May not be an efficient means of covering short term needs. |
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Renewability of coverage will terminate at some point, commonly age 65 or age 75. |
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Cash values tend to be small in the early years. You have to hold the policy for a long time, say over 10 years, before the cash values become sizable |
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If premium is not paid, the policy terminates after 30 days and may not be reinstated if health is poor. |
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Usually no cash values and no non-forfeiture options. |
A valuable feature of life insurance is that the benefit paid to your beneficiary is almost always tax free.
Before withdrawing any or all of the available cash value, ask if there are any tax implications. A portion of the cash value may represent earnings that become taxable on withdrawal.
It's important to review your insurance needs regularly. As your family or business situation changes, so may your insurance needs. Beware, too, of future inflation and the way it could erode your insurance.
If your immediate obligations are large and the funds available to spend on insurance are small, go for whatever insurance policy will meet your needs now. If your choice is term insurance to start with, make sure it’s renewable and convertible into a permanent policy. This will give you the flexibility to make changes later on.
Source: Canadian Life and Health Insurance Association Inc.
C.J.Matthews & Associates Limited are associated with a number of companies who are leaders in the life insurance field; Assumption Life, AIG Life of Canada, Canada Life, Desjardins Financial, Empire Financial, Equitable Life, Great West Life, Industrial Alliance, Manulife Financial, RBC Insurance, Standard Life & Transamerica Life.
For further information, please contact Allan Muise or John Simms.
Useful links for Life Insurance information:
Consumer Information and Publications
http://www.clhia.ca/index_en.htm
A complete range of financial calculators that can help you plan every aspect of your personal finances .
http://www.dsf-dfs.com/en-CA/Prtclrs/EvlBsnsSmltrs/
Financial + Life Insurance Calculators
http://www.investordesktop.com/calcs/index.htm
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