life

Life Insurance
What is it ?

How much is enough

Do You Need Life Insurance

Life Insurance Policies

Permanent Life Insurance

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LIFE INSURANCE

What Is It?

The concept of insurance goes back to the days of the Romans, but it wasn't formalized until the 18th century. 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 cash,the face value of the policy, upon death.

How Much Is Enough?

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.

Do You Need Life Insurance?

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 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 the life insurance play a role in paying the taxes incurred when capital property is transferred from one generation to the next?

LIFE INSURANCE POLICIES

What Different Policies Will Do For You

Though 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; 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.

Basic Features Of Permanent Policies

Level Premiums:

Most permanent policies have premiums that remain level over the lifetime of the policy, even though the risk of death increases with age. To achieve this, the premiums charged in the initial years are higher than the risk you represent then and are invested to form policy reserves that subsidize the premiums paid in later years when you are older and the risk is higher.

Cash Values:

These reserves accumulate as a cash value, or cash surrender value. The cash value is available to you if you want to borrow against your policy or to cancel (surrender) it. (Usually, the cash value is not added to the face amount of the policy, which is paid out on your death).

Non-Forfeiture Options:

These are choices available in a life insurance policy to a policyholder if he or she discontinues premium payments on a policy that has accumulated a cash value. They allow the policyholder to keep the policy in force or to take a cash settlement.

Participating Policies And Policy "Dividends":

A participating policy shares in the financial experience of the insurance company, and policy "dividends" are declared annually and paid to policyholders.

Premiums are based on conservative estimates of future expenses, death claims and interest or other investment earnings. When experience is more favourable than these estimates, a surplus is created, which allows the company to credit participating policyholders with dividends. Because dividends are based on future experience, such as costs and earnings, they are not guaranteed.

Dividends can be paid in cash, left in the policy to accumulate, used to pay part of the premiums, or used to purchase additional insurance.

Non-Participating Policies:

A non-participating policy does not share in the insurer's earnings and does not receive any dividends.

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. The only feature not guaranteed is the policy dividend in a participating policy.

Interest-Rate Sensitive Policies:

Unlike whole life policies, which use very long term interest rate assumptions, these policies use current interest rates, which can be adjusted periodically if interest rate levels change. This offers the policyholder the potential of getting more coverage for less premium, but it involves sharing some of the risk with the insurer. Premiums could be increased if interest rates decrease. On the other hand, premiums could be decreased if the reverse holds true.

The most popular and flexible of the interest-rate sensitive policies is 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.

"New money" or "adjustable"policies usually guarantee the premiums and death benefit for a specified stretch of time (e.g., five years) and re-adjust the premiums and/or death benefit at the end of the period, according to investment conditions at that time.

Variable Life:

Here, the premiums usually are guaranteed, but the cash values vary according to the performance of an investment fund or other index. The death benefits may be guaranteed or may vary with the funds performance, subject to a minimum guarantee.

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.

Term policies are commonly available for terms of one, five, 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 insurance is the lowest cost Life Insurance protection that you can buy for individuals, families and businesses. It is designed to cover a variety of insurance needs such as Income Replacement, Loan-Mortgage-Debt coverage, Buy Sell, Key Person, Education funding etc. Common premium structures are for Term periods of 1, 5, 10, 15, 20, 30, 65, 75 years. Generally, coverage can be Renewable and Convertible (R&C) and Renewable and Non-Convertible (R&NC) up to specified ages depending on the Product.

Term insurance rates are basically categorized into two areas based on Regular and Preferred Underwriting. Regular Underwriting considers the traditional factors of Age, Gender and Smoking status. However, Preferred Underwriting allows lower rates to healthier clients and considers additional factors that influence a person's health such as:

1) Tobacco use
2) Build
3) Blood Pressure
4) Cholesterol Level
5) Medical/Family History
6) Alcohol/Drug Use
7) Driving Habits
8) Criminal Record
9) Low Risk Lifestyle

There is a wide range of competitive Term products that have a host of Preferred Non-Smoker and Smoker classifications. They are designed with various rate scales and underwriting criteria and are categorized such as Class 1, Class 2, Class 3 / Diamond Plus, Diamond / Elite, Preferred, etc. Knowledge of exactly how the client must qualify for the considered rate class is vital and although a client may appear "Preferred", only the underwriting process and medical evidence can confirm this.

It is best to manage the client's expectations at the onset by quoting premiums conservatively (presenting a mid-range class) rather than quoting the lowest top class available. The benefits to this conservatism are avoiding the disappointment of an underwriting decision that is worse than expected and, on the other hand, quoting the client a Class 3 and coming back with a favorable top Class 1 that results in a lower premium!

We represent numerous Term Insurance carriers each with their own unique product features and underwriting strengths.

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Renewable And Convertible Term Insuance

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.

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.

The Importance of Your Agent

Life insurance is a major financial commitment. Just as you seek out expert advisors for other financial needs - bankers, stockbrokers, and the like - your choice of a life insurance agent is a key decision.

Your life insurance agent plays an important role in the financial planning process. He or she:

* Helps you assess your life insurance needs through a financial needs analysis.
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* Arranges for the purchase of a policy.
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* Provides on-going service, such as beneficiary changes, review and updating of life insurance policies.
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* Assists the beneficiary in making the claim.
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* Assists you with other financial planning needs (disability insurance, retirement planning, estate planning).

Agents are licensed and regulated by the provincial government to sell and service life insurance. They may also sell disability insurance, RRSPs, group insurance and segregated funds. Those who also sell mutual funds or other financial services like stocks or property and casualty insurance require a separate license. Not all agents handle every product.

Most agents are paid a commission by the insurance company issuing the product.

* Are the premiums used in the illustration guaranteed? Could they fluctuate and under what circumstances?
* The illustration will probably show policy dividends (if applicable) at the level currently being paid by the insurance company. What would happen to the performance of your policy if dividends fell? If dividends rose? (This is especially important to understand if you are considering a policy where, after a certain number of years, you expect the dividends to be sufficient to pay your premiums.)
* Is the death benefit guaranteed? If not, what factors is it tied to?
* If there is an investment component to the policy, what rate of return is assumed? What would happen to the performance of the policy if the rate of return were lower? If it were higher?

Comparing Policies

Comparing the values of one policy with another can be difficult, especially given the different features and characteristics each may have. But here are some pointers should you decide to make comparisons:

* Comparing term policies is relatively straightforward, provided that the parameters are the same (e.g., $150,000 five-year renewable term insurance for a 37-year-old female non-smoker). Compare what the premium is today for each policy, but also add up what the premiums will be over a 20-or 30-year period. Renewal increases can vary significantly between policies.
* Use "present value" to calculate what all future premiums would cost in today's dollars. The computer software that many agents subscribe to can do this.
* Comparing permanent policies with other permanent policies is more difficult. Are the policies participating or non-participating? What features are guaranteed? What interest assumptions are made? Most companies will provide figures for an "interest-adjusted net payment index" upon request. These indices, while complex, provide a means of comparing similar policies of different companies.

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