Life Insurance Protection for your loved ones
Life Insurance is a financial instrument designed to pay a benefit to the beneficiaries of a policy owner when the policyholder dies.
Term life insurance provides protection for a limited period and pays benefits only if the policyholder dies during the specified time. The major benefit is the reduced cost compared to permanent insurance.
Permanent insurance implies protection for life. It comes in participating (with profits) and non-participating, and can be whole life, limited pay life, endowment, or Universal Life.
Coverage At-A-Glance
Term Life Insurance
Term life insurance provides protection for a limited period and pays benefits only if the policyholder dies during the specified time. The major benefit is the reduced cost compared to permanent insurance. Term policies often function as a supplement to permanent insurance, providing a large amount of coverage for the lowest possible cost. While term policies are in force, the policyholder is offered the right to convert to a permanent policy without evidence of insurability. (Evidence of insurability is the statement of information required by insurance companies that proves the policyholder is an insurable risk).
Term policies are available on a renewable or level term basis. Renewable policies can be issued on a 1, 5, 10, 15, 20 or 30-year renewable basis. These policies can be renewed at guaranteed increasing rates related to the current age at renewal, but as specified in the original policy document. Typically, they may continue until age 80, and are convertible up to age 70. Level term plans are offered in terms, to age 65, 70, 75 and 100.
In the short term, term insurance plans are very low cost but over the longer-term premiums can escalate significantly. Historically and statistically only a small percentage of term policies are in force when policy owners die. It is for this reason that the policies are marketed for such low premiums.
It is usually possible to add a variety of additional riders, such as accidental death and dismemberment, disability premium waiver, and even critical illness insurance coverage to these plans depending on the company. Term Life Insurance is available either as a stand-alone product or supplementary to permanent life assurance policies like Universal Life or Whole life.
Permanent Life Insurance
Permanent life insurance implies protection for life. It comes in participating (with profits) and non-participating, and can be whole life, limited pay life, endowment, or Universal Life. Whole Life, often called Ordinary life or PAR is the original permanent life insurance contract. These plans have level premiums over the life of the contract and on death pay the sum insured to the beneficiary. Premiums are higher than term plans and this difference in mortality costs builds cash values used to fund higher mortality costs at older ages. Cash values can be guaranteed and increase over the life of the contract.
Whole Life or PAR
Whole Life policy owners share in the risk and profits of the company’s participating policy funds. These funds are conservatively invested in bonds, mortgages, property, and stocks to provide steady returns. Whole Life policyholders share in profits through dividends, which reflect investment experience after allowing for expenses, mortality, and profits. Declared dividends can be used to return or reduce premiums, or increase the sum insured and cash values.
Whole Life products have a “bundled” design, where the premiums’ breakdown into mortality costs, expenses, investments, and profit share is not disclosed. The policyholder’s statement shows their premium, cash value, current insurance coverage and the publicly stated dividend rate.
Whole Life policies are suitable for policyholders who are: more risk averse; want balanced, stable steady returns; want the insurance company to control their investments; have stable cash flow to fund premiums; and are satisfied with less flexibility.
Universal Life
Universal Life (UL) is the second type of permanent insurance. It has become extremely popular as it allows the policyholder considerable flexibility in the amount and timing of premium payments. The “unbundled” product design discloses the various pricing elements such as interest earnings formulas, mortality costs, and company expenses.
To understand Universal Life, it is useful to think of it as a bucket of money into which you pour your premium dollars. The bucket has a tap at the bottom, which the company opens to take out the expenses for the policy such as the annual premium tax, the monthly cost of insurance and expenses. The money remaining in the bucket earns interest and growth based on how the funds have been invested in the selected investment accounts.
In a Universal Life policy, the cost of insurance and expense charges are guaranteed. Universal Life policies offer numerous investment options in fixed income and equity linked indexes, and managed accounts where the policyholder can choose where his funds are invested. Certain fixed income investment accounts offer minimum guarantees.
Universal Life offers more flexibility in life coverage, deposits, and investment choices. It is suitable for those who: want to exercise choice and control of their asset mix; are comfortable with normal investment risk; want to monitor and track their investment performance; want an unbundled policy with guaranteed costs; want ongoing flexibility to change their policy as needed.
A key advantage of PAR or UL is that, under section 148(3) of the Federal Income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation. On death proceeds pass tax-free to one’s beneficiaries. However, it is also possible to deposit amounts more than the normal mortality and expense costs and invest these extra amounts in the contract on a tax-deferred basis and provide future favorable income options.