Thursday, October 11, 2012

What type of insurance should you buy?

There are two types of life insurance: permanent and term. They are two different types of protection that satisfy many different life insurance needs. Term may be all the life insurance you’ll ever need, or it may be used as an interim step before purchasing permanent insurance.

Possibly, a combination of term and permanent in the same policy may be the best solution for you. We can show you the strengths of each and their differences.
Permanent life insurance

Permanent life insurance – as the name implies – protects you for your lifetime. It can build cash values and provide a death benefit.  Some permanent policies pay policy owner dividends (participating or par), and others don’t (non-participating).
If the permanent policy you are considering has a cash surrender value, you should review the product guide provided by the insurance company to better understand how the assets backing the policy are managed and how these assets are used to accumulate value within the policy.

Universal life
Universal life provides permanent life insurance with a tax-advantaged investment component. As cash values accumulate, they can be used to pay part or all of the cost of your insurance or to increase the death benefit. You select an investment mix that is as individual as you are – taking into account the amount of investment risk you are comfortable with, and your financial goals and circumstances. This type of policy is generally non-participating and is attractive for people who want to actively manage their life insurance policy.

Permanent participating insurance
Permanent participating insurance policies have potential for earning policy owner dividends. Favourable investment returns, mortality and expense experience generate earnings in the par account – a portion of which can then be paid to policy owners in the form of dividends.

You choose how you want your dividends to be used. The most popular dividend options are either to use dividends to buy additional permanent coverage each year or to buy a combination of term and permanent insurance, which can make a larger amount of coverage more affordable. The first option provides an increasing death benefit that can offset the effect of inflation over the longer term. Higher premium options generally provide higher long-term growth (i.e. paying a high premium may mean you will receive higher values over the longer term). The insurance company manages the investment portion of a participating policy, so it doesn’t require hands-on management by the policy owner.
Assets in the participating account are managed in a diversified portfolio and are invested primarily in bonds, mortgages, equities and real estate.

Term life insurance
Term life insurance is well suited to meeting high, short-term protection needs for the lowest initial cost. For example, a couple with young children and/or a mortgage might select term insurance as an affordable way to obtain the full coverage they need today. Many term insurance plans do a good job of meeting immediate needs and provide the freedom to later move, or convert to a permanent product without providing proof of health. However, this ability to convert to permanent insurance often expires around age 65 or 70.

When purchasing term insurance, it’s important to understand what conversion options you have. Some companies impose significant restrictions or have a very limited choice of permanent plans for conversion.
Many term plans are renewable after five, 10 or 20 years without providing proof of health. The price will increase to be appropriate for your age at renewal, and the increase in premium can become substantial in later years. Coverage ceases for the majority of term contracts once you reach the age of 75 or 80.

When reflecting on the cost of term insurance, be sure to consider the following factors impacting your total cost:
  • the initial premium
  • the renewal rate and whether evidence of insurability is required at time of renewal
  • how long you’ll need the protection
  • how much flexibility you want in case your needs change in the future
Other types of term insurance

Decreasing term (also known as creditor insurance or mortgage life insurance)
Most lending institutions offer creditor or mortgage life insurance as part of their lending or mortgage packaging.  Its primary purpose is to protect the lender. Creditor or mortgage insurance from a lending institution is generally non-convertible term insurance (you can’t move to a permanent insurance plan if your needs change) – there are no cash surrender values and no premium flexibility. A personal life insurance policy has distinct advantages over typical creditor or mortgage insurance such as:

• you can control the amount of coverage, because it’s not tied to the balance of your loan or mortgage.
• your beneficiaries can choose how to use the funds – to pay off the loan or mortgage, provide a monthly income or take care of other immediate needs. It’s their choice, not the lender’s.

• you choose the type of insurance that best suits your needs with premiums to suit your budget – the cost may be lower than creditor or mortgage insurance from a lender.
• you own the policy, not your lender. You have the freedom to switch your loan or mortgage to another lending institution without jeopardizing your life insurance coverage.

It pays to compare. Insure yourself, not the lender.
Group insurance

If you’re working, there is a good chance your employer offers group life insurance. You may also obtain life insurance coverage as a member of an association, professional body, union or club.
Group coverage provides simple, low-cost insurance protection; however, it can have some drawbacks when compared to an individual life insurance policy.

Group coverage doesn’t offer the level of control, portability or choices that can be obtained with your personal life insurance policy. With many group or association plans, you are insured only as long as you remain part of the group. Employment related group coverage is owned by your employer and is subject to change at their discretion based on an annual review. With a group life insurance plan, you have the right to convert to an individual plan when you leave the group or retire, but this is not always practical. Depending on your age when you retire or leave the company, converting to personally-owned permanent life insurance could be expensive or may not be possible.
The right insurance for your needs – value for your money

Life insurance is one of your most personal and important buying decisions. A carefully considered purchase today can benefit you and those you care about for the rest of your life. There are several variables affecting the cost of life insurance and that’s why value doesn’t necessarily rest with the lowest-priced policy. It’s important to understand the factors that affect the cost of your life insurance policy.
• Gender – women pay less than men because statistics show that on average they live longer
• Age – the younger you are, the lower the premium you’ll pay
• Health and lifestyle – good health and sound lifestyle habits usually mean you qualify for the best rates. Non-smokers get a discount.
• Type of policy
• you pay less initially for term insurance
• you pay more for a policy that builds cash surrender values because it provides benefits beyond the basic insurance protection
• Method of payment – you’ll pay less if you choose to pay your premium on an annual basis rather than monthly

Other factors that may impact the premium you’ll pay
• Occupation or avocation – some occupations or hobbies/sports are riskier than others from both a health and accident standpoint which may impact the premium you’ll pay

• Foreign residence – Canadian insurance policies are based on Canadian mortality experience. If you live outside of Canada, you may be exposed to an increased mortality risk which may impact the premium you’ll pay
Your best buy is a policy with features that suit your situation today with flexibility to meet changing needs in the future.

Get professional advice
Purchasing life insurance that meets your needs now and in the future can be complex. That’s why it’s essential to get professional advice from a knowledgeable advisor, supported by a team of experts.

Life insurance is definitely not a one-size-fits-all product. We will take the time to understand your financial goals and insurance needs, your risk tolerance, and the control you want in managing your policy. Then we will help you to consider your options and ensure your life insurance is a good fit for you now, and in the future.  Call us or e-mail us or visit

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