Taking Care of the People You Love with Life Insurance
One of the constant themes within my stories is about how we need to take care of others. There are many ways to show love and respect to those around us and today’s blog is about looking at the options that are available through Life Insurance.
Life Insurance is an old and noble product that has its roots as far back as 600 BC, during the times of the Greek and Roman eras. In fact, it may have even been before that, because references have been found in the time of the Babylonian king, Hammurabi. The concept that life insurance was addressing for the past 2500 years is that each life has future value that is worth protecting.
Our modern financial systems have created 3 broad categories of Life Insurance. This blog will provide a brief synopsis of each. We will not discuss Life Insurance provided by employer benefit plans nor will we discuss life insurance that protects creditor risk. We will discuss those types of coverage later.
- Term Life Insurance: This type of insurance is organized to have a fixed price for a pre-determined time. These types of policies are most popular and common with young people whose incomes are limited but the cost of living can be quite high. For instance, I know a young couple, in their 20’s, with two young children. Their combined income is less than 90,000 before tax. They purchased Term Life Insurance. Because of mortgage debt and the cost of raising a young family, the two responsible young parents are covering the potential lost income if either parent were to die due to illness or injury.
The main benefit of Term Life Insurance is the low cost of coverage when the insureds are young. Over time the price of the coverage will increase. Most term policies expire between age 70 and 80 depending on the company and the provisions within the contract.
- Permanent Life Insurance: This type of insurance is created to have a fixed price of insurance for as long as someone lives. These policies are most popular with young and middle-aged people who want coverage for as long as they live. There are many ways in which these policies can be manufactured. Some plans, called Term – 100, are permanent policies that have a guaranteed price for as long as the insured lives. These plans have no residual value, but the insured has the comfort of knowing the cost of insurance is fixed for many years. Other plans, called Whole Life Plans, have higher premiums, but generate residual value that sometimes appeal to people. Sometimes these plans can be “paid up” for life after 10 or 20 years. There are many different and clever variations to the permanent plans, however, at its core, the insured always knows that if they keep the plan in place, the insurance will pay out regardless of when death occurs.
The main benefit of Permanent Life Coverage is that insured’s beneficiaries are guaranteed a fixed amount of money, usually tax-free in Canada. This benefit is especially valuable because Canadians are so heavily taxed.
- Universal Life Insurance: This type of insurance can technically be called a permanent plan because these plans are designed for someone’s complete life. This essay is creating Universal Life Insurance as a separate category for two main reasons. The first is because these policies often have a “non-contractual” premium paying provision which allows the policy owner to pay very heavily into the policy. Secondly, the policy owner can invest the premiums into a variety of different investment options that may appeal to the client’s desire for risk and reward within the policy. These plans are designed to take on a lot of money, then grow the investment in a tax-free environment, and then pay out tax-free upon death. Universal Life plans are quite sophisticated and have a lot of “moving parts”. If this type of plan appeals to you, make you work very closely with your insurance specialist so that you get the lifetime coverage you expect.
The main benefit of Universal Life Insurance is that it can provide another way to tax shelter money for life. In my experience, the people who really appreciate these plans are high net worth people who have an appetite for portfolio management, on an annual basis, regardless of their age.
- This blog is a very high-level overview of these types of policies. Work with a qualified Life Insurance agent to understand the ins and outs of each of these plans.
- Over 90% of term life policies never pay out. This is because term life policies simply get too expensive as people age.
- Many term policies have conversion options available. This means that the insured can convert from a Term Insurance Plan to a Permanent Insurance plan, without having to give medical evidence. This is a tremendous value proposition that should be explored while one can.
- Getting life insurance requires medical underwriting. If you apply for coverage, you can expect to provide medical and lifestyle evidence. The company wants your business, just not at any price (risk)!