A life insurance policy is a contract with an insurance company. As long as the policy owner (consumer) pays the premiums the insurer is legally bound to pay the benefits provided. The policy owner, however, can terminate the contract at any time by informing the insurer or by discontinuing the premium payments. Premiums are determined by age, sex, health condition and the plan selected.
Consumers have a number of options when purchasing a policy:
Term insurance is, by definition, a temporary insurance. Each month or year, a premium is paid to cover the risk (insurance amount) during that period. Benefits are payable to the beneficiary at the death of the insured.
Term plans have premiums that are designed to remain level for a period of 1,5,10,15,20 years, or even to age 100. Most term plans terminate at a certain age (e.g.: 75,80). Care should be taken when purchasing a Term insurance plan that the consumer has the ability to convert or renew the coverage.
Conversion allows for the policy owner to change to a permanent product without medical evidence. Renewal allows the continuation of the coverage once your selected term has expired without medical evidence. Both features once exercised usually increase the premium the policyowner must pay.
These are important features as they ensure the continuation of the insurance should the health of the insured deteriorate. They also allow for the management of costs as rates escalate with advanced ages. Term insurance is effective for risk, which exist for a certain time frame, or used as a bridge to address a permanent risk until a permanent solution is affordable.
Universal Life policies include insurance and savings in a single tax-advantaged plan. These two components allow for flexibility within the policy.
With Universal Life, you have the ability to change your coverage, deposits and investment choices in response to your changing needs, conditions, or circumstances. Deposits are applied to the policy as they are paid each month or year. The insurance company deducts insurance cost (mortality costs) from the deposits, as well as, for any riders and/or supplemental benefits. The excess deposit is then applied to the saving account, which is made up of an investment mix of your choice.
As a general rule, Universal policies provide for two ways to structure your insurance costs:
- Yearly Term – With this structure the cost of insurance increases as you age. This option may be advantageous if you want to make higher contributions to the savings account in the initial years. Most universal life policies will allow you to convert from Yearly term to Level term.
- Level Term – The cost of insurance is set for the life of the policy. This will most likely be attractive in later years.
Universal Life policies offer a selection of investment options within the policy. As a result, and by design, these policies can develop significant cash values, which can be accessed by the owner of the policy through surrender, policy loans or leveraging. The excess deposits/cash value accumulates in the policy loan on a tax-deferred basis.
Who will benefit from Universal Policies?
• Individuals who have maximized their annual R.R.S.P contributions and who are seeking additional tax-sheltered cash accumulations.
• Business owners seeking to maintain the value of their business, and provide a pension supplement.
• Parents or grandparents who want to give their children or grandchildren a head start on education funding, a first home, or a business start-up fund, to name a few.
Enables insurers to offer coverage for the “whole of life” with payments of level premiums throughout.
During the initial years, the premium is more than adequate to cover the risk. The difference is then invested to form policy reserves, which subsidize what would be an inadequate premium in the later years.
This reserve then creates a cash surrender value for the policy owner. Over the years the reserve can become considerable and can be accessed by policy loans. This concept is often misunderstood by consumers. Withdrawal of cash via policy loans allows for the continuation of coverage. If a policy owner wishes instead to just remove the cash without putting it back, the coverage would terminate or have to be reduced in later years.
“Participating” Whole Life plans also attribute the growth to the reserve from the insurer’s general performance of mortality gains/losses associated with life insurance underwriting. These are usually paid to the reserve in the form of dividends.
Reserves also can be used to provide premium payments, extended term insurance, or even paid-up insurance. Recent years have proven that conservative estimates of future values should be assumed relating to the above. If high estimates are assumed and market conditions dictate otherwise, the consumer will be disappointed with the results. Historically, the growth of the reserves within whole life policies has been very respectable.
In summary, Whole Life contracts are effected by the contractual obligations and performance of a life insurer, where as, Universal Life values are effected by the consumer’s choices and market conditions.
The objective of Disability insurance is to maintain your standard of living in the event you become disabled. Disability insurance provides a replacement income in periodic payments to the insured while disabled. Ideal disability coverage provides protection from any sickness or injury. Less comprehensive plans do not provide sickness coverage or coverage for symptoms that occur 90 days after injury. Coverage for behavioural disorders or injury from high-risk activities may also be excluded from less comprehensive plans.
The actual definition of disability is very important. A good definition of total disability is due to injury or sickness the insured is not able to perform substantial and material duties of their occupation and is under the care and attendance of a physician.? Less comprehensive coverage may specify that total disability requires the insured cannot perform any job.
You need to choose the amount of time you wish to receive benefits should you become disabled. You can purchase plans that provide benefits for 2 years, 5 years, 10 years or to age 65. An elimination period/waiting time also needs to be chosen, this is the amount of time that an individual must be disabled before they can receive benefits/payment. The elimination period is again available in different time intervals. The most common are 30 days, 60 days, 90 days, or 120 days.
The cost of your Disability plan is directly affected by the amount insured, benefit time, and elimination period chosen. Your occupation will also affect the cost of your plan as occupations are related to risk.
Disability plans also offer features and optional riders such as:
• Non-Cancelable Coverage – You want to consider whether your plan is non-cancelable; meaning the insurance company cannot discontinue or cancel your plan. It is in your best interest to get a non-cancelable policy.
• Presumptive Disability – Most contracts also provide for presumptive disability. Meaning through sickness or an accident there is an irrevocable loss of speech, hearing, sight, or loss of use of two limbs. If this occurs, regardless of whether the claimant is working or not, benefits or a percentage of benefits will be paid for the benefit period or life.
• Recurrent Disability – Any reoccurrence of a disability previously claimed for within a specified period of time, (usually 3, 6 or 12 months) will be considered a continuation of the original disability. The waiting period/elimination period would not be required.
• Rehabilitation Clause – Many insurers will pay at least a part of rehabilitation costs for a sick or injured individual.
• Residual or Partial Disability – The definition of this benefit will vary. Residual/Partial disability riders usually state due to injury or sickness, the insured:
o is not able to do one or more of their substantial daily duties.
o not able to perform their duties within the time it would normally take.
o has had a loss of income of at least 20%
o is under the care of a physician.
The benefit period and the benefit available are varied. Residual or Partial disability is an important consideration for business owners, farmers and management.
• Cost of Living Adjustor (COLA) – This option ensures over time your benefits will keep up with the increased cost of living and inflation. Some plans provide indexing that adjusts with the Consumer Price Index while others have specific ranges from 2% to 10%. This is an important option if you are considering a plan that pays benefits over a longer period of time.
• Future Income Option – This guarantees an individual the right to increase their coverage if they have the income to justify the additional insurance, regardless of any changes in your health that may have occurred. Most insurers allow 20% of your option to be exercised annually regardless of any changes in your health.
• Survivorship Benefits – This is the payment of a lump sum amount paid to a beneficiary should the insured die while they are collecting a disability benefit. (Usually based upon 3 months of benefit)
• Waiver of Premium Benefit – If a disability continues for more than a specified period of time (usually 90 days) premiums are waived. Meaning you no longer pay for your disability coverage while you are disabled.
Critical Illness is designed to help with the financial and emotional impact should a person suffer a critical illness. Many lifestyle changes may be required to cope with the effects of the illness. As well, a significant amount of money might be needed to obtain the best medical care.
Critical Illness provides a tax-free lump sum payment upon a diagnosis of one of the covered critical illnesses. This lump-sum payment can be used to cover the costs of added medical expenses, home renovations, mortgage payments, childcare, and housekeeping expenses, or any outstanding debt you may have. You may allocate the funds however you want. Commonly covered illnesses are:
• Heart Attack
• Coronary Artery Disease requiring surgery
• Multiple Sclerosis
• Loss of Speech
• Kidney Failure
• Major Organ Transplant
• Loss of Limbs
The amount insured is determined by the consumer based on needs and premium comfort.
Most Critical Illness policies also offer a return of premium option that reimburses the insured if a claim has not been paid by a certain age. A premium is charged for this option.
Critical Illness coverage is relatively new to Canada and is fast becoming a very popular product due to the benefits associated with the coverage.
Underwriting medical requirements will vary based on age and amount of coverage. If you have a past medical condition the insurance company may request additional information from your Physician. On occasion, policies are rated or have exclusions. A rating means the company feels you are at a higher than average risk and will increase the cost of your plan to compensate for the additional risk. An exclusion means they will not cover a specific illness or body part due to previous history. Medical history, diagnostic tests, financial and general information might be requested depending upon your age, the amount and the type of insurance applied for.
Single Life Plans
Insure one individual life.
Joint Life Plans
Are used when there is one need for several individuals. This is often a cost-effective way to provide coverage. Several structures are available.
- Joint First-to-die
- Joint Last-to-die
Joint First-To-Die are paid out on the death of the first individual insured. A good fit for this type of insurance is Family Protection. A couple would insure to take care of each other and the children should one of them die.
Joint Last-To-Die is a cost-effective way to meet the needs of Estate Conservation. Most individuals arrange their affairs in a manner such that they delay the payment of any taxes until the second spouse’s death. This plan would pay a death benefit on the second insured’s death, thereby creating the necessary dollars to pay the taxes exactly when needed.
Multi Life Plans
Can cover several lives usually to a maximum of 5 lives. These plans can be used to ensure a family or business needs. Multiple life plans allow for a life to be added, dropped or substituted. A life insured may also be able to convert their insurance amount to a separate policy.