Going Back to Basics: Understanding Life Insurance 101

As a Wealth Management professional who’s been in private practice for over 30 years; I know all too well the critical importance and benefit(s) of owning Life Insurance and as much as a small percentage of our population still do not ‘believe’ in life insurance; I beg to differ! Recommendation: Contact me for a complimentary Insurance Needs Analysis or INA.

Here is why! Sadly, I’ve paid over 25 death claims and as much as I don’t plan to be morbid, I have seen first hand what the proceeds of a tax-free life insurance payout accomplished for the beneficiaries. Together, we SAVED homes; we PAID OFF DEBT; we replaced FAMILY INCOME and we PAID CRA TAXES! Beneficiaries have enough to deal with at the time of death; they don’t need the extra monetary or financial stress. Hint: Ensure your Life Insurance policy is FULLY PAID UP at age 65.

The PRIMARY reason you should purchase and own life insurance is to accomplish two (2) objectives and that is to a) Pay Off Debt (including mortgages) and b) Replace Income. Now, if you want to be creative and have a discussion to purchase life insurance for it’s tax-free cash accumulation or to protect future insure-ability or to pre-pay future insurance; have that conversation with your agent. Keep in mind; do not contemplate buying life insurance for no real reason; underwriters need to know the purpose as someone earning $50K cannot and will not be approved for $5 Million; as, there has to be justified and make financial sense.

Types of Life Insurance:

There are basically two (2) types of Life Insurance; Term and Permanent. In this article, I’ll discuss the underlying characteristics of each type; however, I recommend you speak with a licensed Life Insurance broker with at least 20 years of field experience.

Term Insurance

As the name implies; Term Insurance covers the insured for a period of time or term; ranging from One (1) Year, Five (5) Years, Twenty (20) Years; all the way to Term to 100. You may be asking what’s the difference between a Twenty (20) year term vs Term to 100; one word; PRICE! The longer the term the higher the cost; why? See explanation below.

You see; every term has it’s purpose; let’s look at a traditional mortgage amortized over the next 20 years which requires a mortgage life insurance policy to PROTECT the mortgage/debt over the next twenty (20) years; clearly Term (10) ten won’t work; as half way thru the 20 year mortgage period; you would have to renew (for another 10 years) at a much higher attained age.

Keep in mind; Life Insurance companies have ‘mortality tables’ created by actuaries who have mathematically calculated the proposed time of death of every single person from a 1 year old; to 100 years old and they know the percentage of people who will die at ages 30, 45, 60 or even 85. Now, actuaries are not gods; nor do they pretend to be; they are simply looking at and analyzing historical data which suggests when the median of people within the Bell Curve (another discussion) will pass away.

Permanent Insurance

As the name implies; permanent insurance covers the insured for LIFE and the ONLY way the Death Benefit won’t get paid is if the insured stops paying the premiums and or cancels the policy, as once you apply for and are accepted; you’re insured for life.

Types of Permanent Insurance

There are basically two (2) types of permanent insurance; although, I’ll debate including Term to 100; as it also protects the insured until their 100th birthday. For today’s article; I’ll stick to the two (2) types of permanent insurance; Whole Life and Universal Life.

Whole Life (WL) Insurance

As the name implies; the WL policy’s features and benefits are fixed in stone; in other words, neither the agent nor the insured can tweak the structure of the policy; however, it’s benefits; such as guaranteed death benefit are also fixed and illustrated to the insured. One of the features of a Whole Life policy is its Cash Values which grows tax-deferred and can be withdrawn at retirement to supplement a clients income. Hint: If you want a set it and forget Life Insurance policy; a Whole Life policy is the way to go.

Universal Life (UL) Insurance

As the name implies; this type of policy is 100% flexible; you can chose to pay a targeted premium; for a targeted pay period; you can deposit extra lump sum payments to build up your cash values; you can take a deposit holiday (if laid off); and you can choose to be conservative or aggressive with your investments within the UL policy. The beauty of a Universal Life policy is the ability to design the policy that suits you 100% without compromise. Hint: Compare the features and benefits of both WL and UL Insurance.

For more information or to discuss your Life Insurance needs, contact me at riyadm@themoneycafe.ca or visit us at: www.themoneycafe.ca