From the category archives:

Life Insurance Riders

Foresters withdraws Term to 100, other changes

by Glenn on April 2, 2012

Independent order of Foresters (Unity Life, Foresters) has just announced that they are no longer offering a term to 100 life insurance policy effective April 30, 2012.

This is one more in a long line of price increases and market exits over the last year and a half or so.  Almost every insurance company in Canada has raised their premiums on these products or ceased offering them entirely.  And rumours abound that the rate increases are not over yet – we may be seeing another 20-50% premium increase on new issues of these products in the next 1-2 years.

But consumers aren’t the only ones helping Foresters out in the belt tightening.  From their release:  “Further, we will be changing the first-year commission rates of our Advantage Series Whole Life and Passport Universal Life products”

While I personally ignore commissions (I don’t recommend products based on my commission), I can tell you this much.  When a company tells you the numbers are ‘changing’ and don’t follow it with a marching band about rates doing down or commissions going up, then they’re telling you that commissions are going down. So, yes, commissions I assume are going down on these products.

And frankly, that’s fine with me.  There’s a large disparity in commissions between term insurance and universal life and I’d be just as happy to see that financial motivation removed from the marketplace.

(note: there’s a common misconception that lower commissions=lower premiums.  This is not the case – in fact frequently it’s just the opposite. )

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Canadian Tire Life Insurance – a good buy?

by Glenn on March 8, 2012

As a Canadian, we’re required to love and support Canadian Tire, second only to the love of Tim Horton’s. Nevertheless, is their life insurance offering a good buy for us?

I recently reviewed their website and came to the conclusion that in fact, no, it’s not the best product for most Canadians. In the cases that I reviewed, Canadians have far better products available, far cheaper.

1) No medical exam. I think consumers don’t understand this. You may think that you can just call, and you instantly have a life insurance policy. That is not the case. There is no physical exam, however there is an extensive medical questionnaire. That medical questionnaire is reviewed and underwritten, and if they don’t like it, you get declined.

Any number of life insurance companies offer insurance policies that don’t require a physical exam at smaller amounts of insurance. Rather than sending a nurse out, answering a variety of questions is used instead.

In short, don’t confuse ‘no medical exam’ in this case as meaning ‘no underwritting’. There is underwriting and you can be declined.

If you’re likely to be declined, you should use a broker who is able to shop the market from a variety of companies to find one that is lenient for your specific condition.

2) It’s term insurance. Actually, it’s 5 year term. That means the premiums are level for 5 years, after which point they increase. They don’t appear to disclose on their website what happens after 5 years.

3) Premiums are inexpensive. Uh, no. Not even close – expensive is the word I’d be using. I ran a Male Nonsmoker age 47 for $250,000 recommended you read. Canadian tire premiums for 5 years: $65.75. RBC premiums for 10 years (not 5 – level for 10), $33.64. Yes, you’re reading that correctly – you can get insurance with rates that are level for 10 years, at half the price of CT Life’s policy which is only level for 5 years. It pays to shop around.

4) What happens in 5 years? No conversion. A typical term insurance policy you would select through a broker would normally have the abilty to convert your policy to permanent. While not an option you may expect to use, this is a serious fail safe clause should you become uninsurable. With CT Life’s 5 year policy, you’re locked in to their policy with premiums after 5 years that they’re not disclosing until you get the policy – and it expires completely at age 75. If you become uninsurable, you have no options. With a typical term life insurance policy you can switch your term policy to permanent, thereby locking in your premiums level for life – with no medical exam and at healthy rates.

5) Who you gonna call? If you purchase your life insurance through CT Online, who you gonna call when you have questions? Need to change your banking? Have a claim? Canadian Tire? Really? As an online broker myself, I have seen this criticism of my model before – but there’s a difference. I do business remotely, but I am still a physical life insurance broker you can call for service (I just don’t come out to your home for sales presentations). With brokers, including online brokers, you typically are able to get service directly from a professional involved in the life insurance business – not a call center.

In short, consumers have products with similiar underwriting, better features, and substantially lower premiums. While I love my Canadian Tire store as much as the next Canadian, CT Life’s product is a case of using a great brand name to market a sub-par life insurance product. Shop around, you’ll be better off.

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More Universal Life Thoughts

by Glenn on February 28, 2009

I’ve previously commented on Universal Life Insurance but wanted to expand on that a bit.

Universal life insurance in Canada belongs to the permanent insurance category. Typically you would consider universal life if you’re looking at life insurance needs for the rest of your life – forever. i.e. you know today you want the insurance when you’re 60,70,90 or 300 years old.

A universal life insurance policy consists of two aspects or features. The first one is the insurance cost. The second part is the investment component. Within these two components we have a myriad of options.

Lets look at the insurance portion to start. Note that we can treat the policy as just the insurance portion and completely ignore the investment part. And it’s a good idea to do that as the basis for your investigation. Let’s say you purchase $100,000 of Universal Life (UL). We’re going to be keeping the insurance in force for a good long time, so we need to know what the insurance premiums will look like over the duration of the policy.

There are two basic premium structures available; level and YRT. Level insurance costs means the premiums are set to never change – they’re level for life. No surprises now, or later in life when it comes to the underlying insurance costs. As an aside, we only ever recommend UL with level insurance costs.

YRT premiums, or Yearly Renewable Term, has premiums that go up every year. The premiums are based on your age, so they start out cheap when you’re younger but increase over time.

There are other options available with some companies where they mix these two (YRT for 20 years, then going to straight level) but that’s they all tend to be mixes of YRT and level.

Now lets look at the investment part. The way this works is any money put into the policy above and beyond the basic insurance and administration costs go into the investment part (or you can just pay the base insurance and admin costs and leave the investment part at $0). Let’s say your basic insurance premiums are $50 per month. If you pay $50, you have your life insurance and your investment sits at $0. If you pay $100 a month, the first $50 pays your insurance and the remaining $50 is put into the investment ‘bank account’ where it hopefully grows and earns interest.

What type of investment options are available? Well, these investment options look a lot like mutual funds. They’re not mutual funds but viewing them as such does give us a pretty good snapshot of what they do. And just like mutual funds, the world’s your oyster when it comes to investment options. All the insurance companies have their own myriad of investment options and some of them actually track well known mutual funds. Manulife for example has something in the range of 25 to 50 different investment options. Wawanesa conversely has a handful, most of them the standard index funds (if you’re an index fund kind of investor…and if you’re not you probably should be).

But! just lke mutual funds, these investments are typically not guaranteed. This ability for investments inside a UL policy to crash and burn just like the stock market or your mutual funds is the biggest risk I see. Be aware when reviewing a universal life insurance presentation that if it depends on some investment option, that quite likely that investment option is not guaranteed. If your investments track mutual fund A, and mutual fund A just crashed by 40%……then the investments inside your UL policy just dumped by 40% as well.

Another thing to consider is that some UL policies will offer some guaranteed investment. Something like a GIC type of rate would be common, maybe at 2 or 3%. But you only get those guaranteed rates of return if you actually invest in those GIC types of vehicles. If you invest in the equity based investments, you’ll not have those guarantees so if your illustration shows equity based investments with GIC type of rates, be careful.

The next thing to carefully consider when looking at investments inside a UL policy would be surrender charges. Some investment options require that your money stay inside the policy for a minimum amount of time. Withdrawing money back out from the policy prior to that time results in very heavy charges. I see no need to invest in a product like this when there are plenty of products available that don’t have these fees.

So what’s the benefit of the investment inside a UL policy? Very simply, money invested inside the policy grows on a tax sheltered basis. Just like an RRSP, if you earn $100 inside the policy you don’t have to pay taxes on it as long as the money stays in the policy. Unlike an RRSP, you don’t get a tax break on deposits (which means that RRSP’s are your first line of investment strategy whenever possible).

I’m going to write about some advantages in my next article, but for now, lets look at some pitfalls with universal life. (Note that I believe Universal Life is a great product. But you need to know what you’re getting and what the risks are). Lets say you want to build up a bunch of cash inside the policy for some reason later.

How to do that? Well, we want to shovel as much money into the investment portion as we can, as early as we can. Since we always have to pay at least the base insurance premiums we may decide to minimize those insurance premiums by going with YRT insurance costs. This gives us more money (since YRT premiums are initially lower than the level insurance premiums) to start putting into the investment portion. That early start we assume allows that investment to grow higher, faster. And if things go well, that’s exactly what will happen.

But things can go not so well. Let’s say you go with this strategy, but your investments later crash and burn (remember, the investment portion isn’t normally guaranteed). Now you’ve got poor investments and worse, you’ve got those high YRT premiums to pay since they get expensive later.

Consumers can and have ended up in similiar situations. Because we’re dealing with long durations, sometimes spanning decades, we may not realize the problems until many many years in the future. So it’s vital that you address all of this upfront when you purchase the policy. If you didn’t, now’s the time to pull out your UL policy and have another look at what you’ve got.

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Five common mistakes when buying life insurance

by Glenn on January 17, 2009

Here are perhaps the five most common mistakes consumers make when buying life insurance. Avoid them, and you’ll be better off (and have more money in your pocket).

  1. Failing to shop around on price. Agents and brokers all have their own favourite companies they promote and sell. But does company matter? For most of us, and for most types of life insurance coverage, either the least expensive company or close to the least expensive is going to be as good as (or better) than other more expensive companies. If your broker isn’t recommending the least expensive life insurance company, you can run quotes on this site (see the life insurance quotes system in the top right of this page).
  2. Buying the wrong type of insurance. Do your research on the available types of insurance. Most consumers should be looking at some form of term life insurance. Purchasing whole life or some other form of permanent insurance when term life insurance is better suited means you’re going to spend a lot more money on life insurance. Conversely, for the smaller percentage of people who either need or prefer permanent insurance, buying term life insurance instead of something like universal life insurance means we’ll be out a lot of money over the long term.
  3. Failing to purchase term life insurance without the conversion privilege. This is probably the least frequently discussed feature on Canadian life insurance today – and it’s one of the most important….AND it’s available for free on most (but not all!) term life insurance policies in Canada. It’s an airbag for your life insurance policy, insurance for your insurance policy, your back door out of a term policy if everything’s gone wrong. Many won’t use this feature ever, but if you need it, it’s everything. It’s free, make sure your term policy has this before purchasing (and make sure it’s ‘term to permanent’ conversion, not term to term).
  4. Not getting everything guaranteed. In today’s life insurance marketplace, you should be able to guarantee just about everything. That includes future premiums (and not just the internal premiums, but the actual premiums you pay). For example if you want to have your life insurance policy premiums paid up or go to 0, you can do this on a fully guaranteed basis. Or you can get a fancy investment based calculation that may look good, but is not guaranteed. Purchasing a life insurance product that is not completely guaranteed is completely at odds with the insurance concept. And in today’s insurance marketplace, there’s little need to do so.
  5. Buying too little insurance. This typically goes hand in hand with purchasing the wrong type – get the wrong type of insurance and the only way to make it affordable is to buy too little. In addition, most consumers seriously undervalue how much life insurance they need to provide their dependents an income over a long period of time (say long enough to get the kids out of the house). If you’re spending your entire $50,000 of paycheque each year keeping the household together, how long do you think $250,000 is going to last when you’re not around? 5-6 years? That’s not long enough if you’ve got young kids. You can use the how much life insurance do I need calculator to get some estimates.

Pay close attention to those 5 tips and you’ll be a lot closer to ensuring you’re keeping your hard earned dollars in your own pockets.

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Renewable and Convertible Term – The Conversion Priviledge

by Glenn on July 17, 2008

I’d previously covered the ‘renewable’ part of Renewable and Convertible (R&C) term life insurance. In this post I’m going to discuss the convertible part of the product.

First, this conversion priviledge is essential. I never recommend a term policy that does not have this. While most companies offer this on their term insurance policies a few do not. This benefit is provided free of charge. Do not buy a term policy that does not have this option available to you. This feature is not something that you’ll likely need – but if you do need it, it becomes everything. This feature is the most underrated option on term insurance in Canada yet it’s a total life saver if you actually need it. It’s the failsafe for your term policy.

What the conversion priviledge does is simple. It lets you trade in your term insurance policy for a permanent life insurance policy without a medical exam. Both the first and last part of that phrase work in conjunction – changing from term to permanent, and doing so without a medical exam. (Note that there is an age limit to doing this; age 70 is common. After that age the feature expires.

Let’s say you’ve bought 20 year term life insurance because you know that in about 20 years you won’t need the insurance and are planning on dropping it. That’s the case for most folks with young families and mortgages – both of which tend to disappear in roughly 20-30 years (at which point they don’t need to be covered anymore). That’s great – if things go well we’re done.

But let’s look out 20 years. In 20 years time, at the renewal of your term life insurance policy there’s three options available to you.

The first is that things have happened as planned. Kids are gone, mortgage paid, we don’t need the insurance. So we drop it. Fair enough.

The second possibility is that something’s changed and you decide you still need an insurance policy. If you’re healthy, the solution is easy enough. Shop around from a life insurance broker, find an inexpensive company and take a new medical exam.

The problem arises in scenario 3. Let’s say you’re 20 years out and decide you still need the insurance – but you’re unhealthy and can’t get a new policy. You’re faced with enourmous price increases at renewal with your term insurance policy. So you still want insurance but have these huge premiums.

Solution? Enter the conversion priviledge. At that point (assuming you’re still younger than the expiry age of this feature) you can simply hand in your term policy and demand a permanent life insurance policy…with no medical exam! It doesn’t matter if you’re so ill that you crawl in on your hands and knees. The insurance company is guaranteeing that you can purchase a permanent insurance policy at that time. AND you’ll get the same rates as someone who just bought a permanent insurance policy, has just taken a medical exam and received regular rates.

See how much of a lifesaver this is? When everything else goes wrong, we’re unhealthy, can’t get insurance, it’s 20 years later and in retrospect we wish we’d bought permanent insurance, the conversion priviledge is going to save our bacon. And since this feature is available for free from most companies (but not all), you can see why I only recommend term products from companies that have this feature.

There’s also another common use for this feature. Many folks at renewal decide they don’t need a large term insurance policy. But also at renewal some folks decide they’d actually like a small permanent insurance policy. Just something that will cover funeral and final cleanup expenses, or something small to leave to someone. Yet now you’re approaching retirement and while not unhealthy you may have less than perfect health. Maybe a bit of cholesterol or high blood pressure – whatever. The conversion priviledge also fits that scenario. It’s straightforward to convert your term insurance policy to a permanent insurance policy, then decrease the face amount down to something smaller. Now you have a small face amount permanent life insurance policy that’ll last you the rest of your life.

A couple caveats to all of this. Well, not so much caveats as footnotes. While the ability to convert is a contractual priviledge, what’s available to convert to is not. You’ll be converting to whatever permanent products are available in the future and we have no idea what those products will be. So that is one risk. The second thing to remember is that you’ll be converting based on your future age. Clearly that’ll be more expensive than buying it now (since life insurance costs more as we get older). The trade off is that you get to defer paying those premiums until much later as well as deferring the decision to even pay those premiums until much later.

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Children’s Protection Rider (CPR)

by Glenn on November 10, 2007

There are four common riders available on life insurance policies. In no particular order they are Accidental Death Benefit, Guaranteed Insurability Option, Disability Waiver of Premium, and Children’s Protection Rider (CPR). Out of all of those, CPR is the only product I routinely recommend.

In most cases putting life insurance on children doesn’t make financial sense. Paycheque earners have a need to financially protect their families in the event of their death. Not so with children. There are any number of sales techniques used to promote the sale of individual policies on children, but that’s what they boil down to – sales techniques.

Now, there’s one instance where I do recommend insurance on children. And that’s when it covers a small need and is dirt cheap. CPR covers both of those well.

Here’s the way most CPR riders work. For a small premium – typically about $50 a year for $10,000 – the insurance company will cover all of your children whether that be 1 child or 30. And they’ll cover them generally from the ages of 15 days old to somewhere between 18 and 25; that varies a bit by company.

In addition once the children are old enough not to be covered under CPR any more, some companies will let them purchase their own individual policy without evidence of insurability. So if one of your children became uninsurable in the future but was covered under your CPR rider at some point they could still have their own albeit small life insurance policy.

Here’s the neat part though – the insurer will cover all of your kids for the one single premium. The same $50 (or so) covers all your kids regardless of how many you have. Have more? In most cases they’re automatically covered once they’re 15 days old without any additional cost.

So while I rarely if ever think insurance on children is a good idea, with all those great features and in conjunction with a very low cost, I do recommend the purchase of a CPR rider for most people.

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Disability Waiver of Premium

by Glenn on November 10, 2007

Disability Waiver of Premium is another rider available on life insurance policies (for other common riders see Accidental Death Benefit).

Disability waiver or premium (WP) is intended to waive your premiums should you become disabled. More specifically this rider will pay your life insurance premiums after generally 90 days, should you become disabled per the definition of disabled in the life insurance policy.

Now that initially sounds like a good idea. You become disabled, you still have your life insurance. And in fact the idea that you want to keep your life insurance should you become disabled IS a good idea. But this rider isn’t the way to pay for it.

Rather than buying disability insurance piecemeal on every little debt, a wise person should have proper disability insurance to protect a percentage of their entire income. For example, should you become disabled a good disability policy might pay 2/3’s of your regular income. That income can then be used to pay for your insurance policy as you would normally. And pay your mortgage. And make the car payments. And maybe buy some groceries. In other words, a proper disability plan should allow you to continue to meet your obligations and not just a small subset of your obligations.

Waiver of premium riders on life insurance policies, while they do work, are a bandaid solution to potential disability. Proper disability coverage should be taken out to cover your income, not just a small portion of your monthly outlay.

In short, like the accidental death benefit rider, disability waiver of premium rider is another option that I don’t normally recommend.

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Accidental Death Life Insurance

by Glenn on November 10, 2007

Most life insurance policies in Canada have a number of options available. These options are called ‘riders’ in the industry. One of the most prevalent riders is Accidental Death.

The Accidental Death rider pays out an additional death benefit should you die as the result of an accident. That may sound nice, but it’s important to remember that this rider costs money to buy; it’s not free.

I don’t recommend Accidental Death life insurance and here’s why. If done properly, you should know how much life insurance you need. If you die as the result of an accident do you all of a sudden need more life insurance? I don’t know of a single instance where more life insurance is needed because of ‘how’ you die. If you’re buying mortgage life insurance you don’t need more life insurance because you died as the result of an accident. If you’re planning estate needs, those needs don’t change because you died as the result of an accident.

In short, if you need additional life insurance, buy it. If you don’t need additional life insurance, don’t spend your money. The amount of insurance you need doesn’t change as a result of how you died.

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