The top things to know about life insurance.
Confused about insurance choices? Let’s assume that you have decided that you need life insurance. This is either because you understand its impact, or you have done the analysis of your needs with a financial advisor. So now, what you want is to have a more in-depth understanding of your choices.
If you are working with an advisor, he may have recommended a choice of coverages for you that suit your current needs. Although he may have touched on some alternatives, it is possible that you did not absorb, in detail, everything that was discussed. The product mix can be somewhat confusing, even in its apparent simplicity.
What, if anything, is simple about insurance? Well, in the case of life insurance, we commonly deal with two broad ranges of product: Permanent Insurance and Temporary Insurance. Their names define them, but within these categories are a wide range of variables. Permanent is for your whole life and Temporary has a fixed term, which can be almost infinitely adjustable. The temporary coverage is very much like auto insurance, in that you must have a catastrophic event to benefit from it. And, even then, it is your heirs and estate that will see the benefit, not you.
Let’s have a look at Permanent insurance and what it offers in the way of benefits, to you. As it is for your whole life, you will not need to replace it on expiry, as the coverage has no termination date. The premium for Permanent insurance, once it is determined by the insurer – health considerations and other life risks can be a factor – will not change for the life of the insured. A fixed-payment term can be agreed upon with the insurer that will see the policy fully paid up, so that by that date, all monthly payments cease and the coverage stays in place for your whole life. Furthermore, you will never pay the full face-value for your life coverage as the insurer discounts the policy cost, based on the insurer’s actuarial analysis of you the insured: expected lifespan and years the insurer expects to amortize the eventual payout.
Permanent insurance, those policies described as “Whole Life” and “Participating Whole Life” will, with time, build up cash values. In other words, a portion of your premium will begin to accumulate in the policy as a cash reserve. With the “Participating (Par)” concept, this will be added to by the insurer’s payment of a dividend into this cash value. The dividend may vary, according to the fluctuations experienced in the insurer’s return on investment of the premiums, but several insurers have established a long history of dividend payments and have kept these well above the rate of inflation. Today, they are much better than bank returns.
So, what are the key benefits of permanent insurance?:
Coverage for life.
Dividends, create savings growth.
Temporary, or “Term Insurance”, covers you for a limited amount of time. In some cases, the time covered can be quite flexible. Terms may vary from ten years to 30 years and every year up to that commonly accepted maximum. Because this coverage is temporary, it is best to think of it in terms of protecting you against an obligation to your spouse or estate that would be devastating if you were no longer there to service that obligation and for which you have a fixed term: car loan, mortgage, personal line-of-credit, amortized medical costs or business line-of-credit. Term or Temporary contracts do not accumulate a cash value, nor do they benefit from an insurer’s dividend. However, they can be considerably less costly than Permanent insurance and, where permanent coverage is already in place to take care of long-term and lifelong obligations, Term can be bought in large denominations to protect your estate from crippling debt in the event of your demise.
The advantages of Temporary insurance:
Lower cost than permanent coverage.
No obligation beyond the chosen term.
Can be converted at any time, whole or in part, to Permanent coverage.
Is guaranteed renewable in case your health deteriorates during the original term.
Are there more variations on the above coverages? There are and they are comprehensively flexible to your needs. The two concepts can also be used in tandem and this is often a good choice for the insured. Permanent coverage can be the basic policy, so that you have the coverage you need for estate planning, going well into the future; while the Term coverage as a rider takes care of the fixed exposure of debt or other estate needs, such as the continuing care of minor children.
A comprehensive interview with your advisor will help him/her build a solid profile of who you are as a client and what your needs are going forward, both for the short and the long term.