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What
is Life Insurance?
Life
Insurance is a way to protect your survivors and dependants against financial
hardship. A life insurance contract or policy is a legal agreement between
you and an insurance company that guarantees payment of cash, the face
value of the policy, upon death.
A valuable feature of life insurance is that the benefit paid to your
beneficiary is almost always tax free.
How
much do you need?
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
need 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.
Though
it seems there is a bewildering array of policy types and names, they
all boil down to two basic form 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 survivor's income; covering
capital gains taxes at death, especially if family property is to be passed
on to the next generation; children who remain dependent for their lifetimes,
often due to a disability.
Permanent
life
insurance has several variations: whole life, universal life, variable
life. All are designated to provide insurance protection for you entire
lifetime, as long as you keep the policy in force.
Term
life policies
provide insurance coverage for a specified period (e.g. 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.
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 have reached 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.
Types
of Life Insurance
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Permanent
|
Term
to 100
|
Term
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| Policy
Type |
Whole
Life
|
Universal
Life
|
Term
to 100
|
Term
|
| Period
of Coverage |
Life |
Life |
To age 100 or
life, depending on contract |
Depends on term
in contract. Often renewable for additional terms but usually not
past age 70 or 75. |
| |
Whole
Life
|
Universal
Life
|
Term
to 100
|
Term
|
| Premiums |
Guaranteed.
Usually remain level |
Flexible.
Can be increased or decreased by policyholder within certain limits. |
Guaranteed.
Usually remain level |
Guaranteed
and remain level for term of policy (e.g. 1 year, 5 years, 10 years,
etc.) Increase with each new term. |
| |
Whole
Life
|
Universal
Life
|
Term
to 100
|
Term
|
| Death
Benefits |
Guaranteed
in contract. Remain level. Dividends may be used to enhance death
benefits in participating policies. |
Flexible.
May increase or decrease according to fluctuations in cash value fund. |
Guaranteed
in contract. Remain level. |
Guaranteed
in contract. |
| |
Whole
Life
|
Universal
Life
|
Term
to 100
|
Term
|
|
Cash
Values
|
Guaranteed
in contract. |
Flexible.
May increase or decrease according to investment returns and level
of policyholder deposits. |
Usually
none. (Some long-term policies have a small cash value or other non-forfeiture
value, after a long period, say, 20 years.) |
Usually
none. (Some long-term policies have a small cash value or other non-forfeiture
value.) |
| Other
Non-forfeiture Options |
Guaranteed
in contract |
Guaranteed
in contract |
See
above |
See
above |
| |
Whole
Life
|
Universal
Life
|
Term
to 100
|
Term
|
| Dividents |
Payable
on "participating" policies. Not guaranteed. |
Most
policies are "non-participating" and do not pay dividends. |
Most
policies are "non-participating" and do not pay dividends. |
Most
policies are "non-participating" and do not pay dividends. |
| |
Whole
Life and Universal
Life
|
Term
to 100
|
Term
|
| Advantages |
•Provides
protection for your entire lifetime - if kept in force.
•Premium
cost usually stays level, regardless of age or health problems.
•Has cash
values that can be borrowed, used to continue protection if premiums
are missed, or withdrawn if the policy is no longer required.
•Other
non-forfeiture options allow the policyholder various possibilities
of continuing coverage if premiums are missed or discontinued.
•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.
|
•Provides
protection to age 100 - if kept in force.
•Premium
cost usually stays level regardless of age or health problems.
•Premium
cost is lower relative to traditional permanent policies.
|
•Suitable
for short term insurance needs, or specific liabilities like a mortgage.
•Provides
more immediate protection because, initially, it is less expensive
than permanent insurance.
•Can be
converted to permanent insurance without medical evidence (if it
has a convertibility option), often up to ages 65 or 70
|
| |
Whole
Life and Universal Life
|
Term
to 100
|
Term
|
| Disadvantages |
•Initial
cost may be too high for a sufficient amount of protection for your
current needs.
•May not
be an efficient means of covering short-term needs.
•Cash
values tend to be small in the early years. You have to hold policy
for a long time, say over 10 years, before the cash values become
sizable.
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•Usually
no cash values and no or limited non-forfeiture values.
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•If renewed,
premiums increase with age and at some point higher premium costs
may make it difficult or impossible to continue coverage.
•Renewability
of coverage will terminate at some point, commonly age 65 or age
75.
•If premium
is not paid, the policy terminates after 30 days and may not be
reinstated if health is poor.
•Usually
no cash values and no non-forfeiture options.
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What
Documentation Is Needed?
In
most cases, a claimant's statement on a form provided by the insurance
company, and proof of death, doctor's statement or death certificate are
all that's required.
Life
insurance companies are dedicated to considerate and prompt payment of
death claims. Efforts are continually made to speed up the process. Payment
can usually be expected within a week to 10 days of presenting the insurance
company with full documentation.
Will
a Clam Be Paid If Death Is Due to Suicide?
Individual
policies normally contain a two-year suicide clause. If death is due to
suicide and occurs within two years of taking out the policy, the claim
is not paid. If a suicide occurs after the two-year period, the claim
is paid.
Are
the Benefits Taxable or Available to Creditors?
As
a rule, the death benefit of a life insurance policy is not taxable.
Where the designated beneficiary of the policy is a spouse, parent, child,
or grandchild of the life insured, provincial insurance laws provide that
the policy and its benefits are not accessible to the creditors of a policyholder
either during his or her lifetime, or upon hi or her death.
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