From the category archives:

Types of Life Insurance

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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New AIG 30 year term product with exciting new features.

by Glenn on October 27, 2008

AIG in Canada has just released a new 30 year term life insurance product that’s very interesting. I’m going to put aside the issue most folks currently have with AIG (given the bailout of their US corporate parent). I would like to preface this with a comment though. I personally prefer 30 year term life insurance conceptually over most other types of term insurance, for most cases. I think 30 year term better fits the child rearing need, mortgages, and the need to insure younger people’s income better than say 20 year term. Nevertheless in most cases we recommend 20 year term due to cost reasons. 20 year term life insurance is roughly half the cost of 30 year term and for most cost sensitive consumers they prefer to rely on the conversion privilege if needed.

Here’s the deal with AIG’s new 30 year term. At the end of the term, it automatically renews as level term to 100 life insurance. That means level premiums for the rest of your life, guaranteed never to increase. This is a great idea they’ve got. In our younger years we want and need high levels of protection at the lowest premium we can get. 30 year term fits that need well. As we age however, our preferences tend to move towards permanent life insurance coverage. No longer are we looking at high amounts to look after our kids and dependents, we generally start thinking about leaving a legacy, covering off funeral costs and other permanent type needs. For those of you who are term believers all the way, you’ll have to trust me that in fact most people do tend to lean that way :).

The question I had was how the renewals look – the level term to 100 renewal. It turns out, they’re cost competitive with other non-level term to 100 renewals. They’re also half the price or less! of other term to 100 products available today.

Let’s run some numbers shall we? I took a 40 year old male nonsmoker, regular health for $500,000 and ran a Compulife quote for 30 year term (this is the same comparison available in the top right corner of this site – though our internal version does have some additional information that we can’t conveniently provide online). Here’s the results.

Primerica comes up number 1 at 108.30. However their product does not have a conversion option – and I cannot recommend a term product that does not have conversion (I’ve had 70 year old’s call me with life insurance that didn’t have the conversion feature – and they’re basically screwed if their health is bad).

Outside of AIG, the other three companies available are Industrial Alliance, Transamerica, and Unity. All three have conversion. However for this age, Industrial Alliance renewals are YRT (you don’t want annually increasing costs of insurance that are age based at age 70, so you’d have to convert if you wanted to maintain your insurance coverage and can’t take a medical). Transamerica and Unity Life renew level for another 10 years and 15 years respectively, at which point the policies lapse. Both of these products have renewal premiums at age 70 just the far side of $2000 for this case. So does AIG – but remember those AIG premiums remain level for life, not just for 10 or 15 years.

So in comparison to existing renewal premiums available on 30 year term life insurance, AIG’s renewals win hands down. They’re the same price or cheaper than similiar products – yet they renew level for life instead of expiring like most term products.

So now we’re 70 – how does our renewal premium look compared to what’s available at that time? Well we won’t know for 30 years, but lets compare it to what’s available today. AIG’s 30 year term again shines. The exact renewal premium is 2082.60 per month. I did a very rough present value calculation at 3% inflation (2082.60/1.03^30) and end up with a premium of $858 in today’s money. In other words, the real cost of $500,000 at age 70 for that insurance coverage is $858 if you bought it today. Now how does that compare with what’s out in the marketplace? You won’t believe this – it’s half the price. A Universal Life insurance comparison for a 70 year old for $500,000 done today (you can check this on our quote system above) is $1779 per month. And to get that premium, you’ve got to take and pass :) a medical exam. Or if you had purchased the AIG product 30 years ago, you’d have access to that coverage at less than half that price at $858, and NO Medical Exam!

All in all AIG has really out done themselves with this product. I’d be in love with it and offering it to all of my clients if it weren’t for two drawbacks. The first one is as I noted, AIG’s bailout issues which has consumers skitterish, and the second one is still the large price discrepancy between 20 and 30 year term. What we need is a company that doesn’t have AIG’s perception issues to do this, with a slightly lower price differential. I would be recommending such a product to most of my clients. It would be exactly what most term purchasers need, at a viable price. And as an advisor, I’d be certain that once the coverage is in place the clients would be unlikely to need much further advice – ever! (though for you actuary types, you’d better read up on your lapse based assumptions before doing the pricing :). If the market place had such a product clients would likely never lapse such a product).

If you have questions about 30 year term, 20 year term, or any kind of term life insurance coverage, feel welcome to contact The Term Guy toll free at (866) 662-5433.

*update* I use a software database to quote all these rates. I’ve just received notice that the database was showing the renewals on Transamerica incorrectly. In fact, Transamerica’s 30 year term also renews out level to age 100, just as the AIG product does. That makes Transamerica’s 30 year term currently cost competitive with others in the marketplace. Transamerica also has a few other features that they like to promote, but it’s my opinion that the additional features are not worth any additional premium (if they’re free great, otherwise I wouldn’t pay for them).

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Life Insurance Types – Universal Life Insurance

by Glenn on June 30, 2008

This is part 3 in a 3 part article intended to make the types of life insurance less confusing.

These three articles should be read in order.

  1. Life Insurance Types – Term life insurance
  2. Life Insurance Types – Whole Life and Term To 100
  3. Life Insurance Types – Universal Life Insurance

(Continued from previous article)

The third and final type of permanent insurance is called Universal Life Insurance. Basically what the insurance companies have done is take a Term to 100 policy and added an investment vehicle on the side. The investment vehicle works kind of like an RRSP or a mutual fund, though it is neither.

The investment portion is flexible – you don’t have to put in money, or you can at different intervals (subject to some government guidelines). Let’s say for example the Term to 100 premium inside a universal life policy is $100 a month. If you pay $100 a month, the insurance takes the premium and pays your Term to 100 premium – end of story. So what you basically have is a term to 100 policy.

Now if instead you pay $200 a month into the universal life insurance policy the company takes the first $100 and pays your Term to 100 life insurance premiums. They then take the remaining $100 and put it into the investment portion of your policy. Unlike an RRSP, those contributions are not tax deductible. However like an RRSP, the investment inside a Universal Life insurance policy grows on a tax sheltered basis.

That tax sheltering of the earnings on the investment portion have led to all sorts of weird and wonderful sales concepts from the life insurance industry. If tax sheltering isn’t an issue, UL probably isn’t for you. However for higher income and more affluent individuals, this tax sheltering can be very beneficial.

Here’s two simplified examples. Let’s say your premiums on the Term to 100 policy are $10,000 a year. And let’s assume you have managed to put $100,000 into the investment portion of the Universal Life policy. Let’s make a big jump and assume your investment portion earns 10% :). So your $100,000 investment produces $10,000. Now here’s the cool part. If you use that $10,000 from the investment to pay your life insurance premiums, you’ve just paid your insurance premiums with pre-tax dollars! Doing the same thing outside a Universal Life Insurance policy means you’d probably have to earn $20,000, pay about $10,000 in taxes to leave you with the $10,000 needed to pay your premium.

Another example that is a bit more aggressive involves a bit of leveraging. Let’s say you build up a substantial amount inside your Universal Life Insurance policy over the years prior to retiring. Now you’ve got a ton of cash sitting there that you can’t pull out without paying taxes on (since the earnings inside the policy are only tax deferred until you pull the money out). So instead of pulling the money out of the policy, you use the policy as collateral on a loan from a bank. The loan of course is tax free money. The banks will have some limites on the amount of the loan with relation to the amount of money in the insurance policy, but it can be set up so that you never pay the bank back – they get their loan paid back when you die from the insurance policy (which pays out the life insurance amount plus the investment amount). Voila – getting at tax deferred income without paying the tax on it. No, I have no idea why CRA lets our industry get away with that one :).

Two other points on Universal Life Insurance. First, in addition to having Term to 100 as an insurance component, some companies also offer 1 year term insurance as the insurance component (see the 1 year term insurance explanation in my previous post on term insurance). The idea is that the cheaper premiums of 1 year term in the early years allows you to save more money earlier to invest faster for the later years (more money earlier allows that money to compound for a longer period). If you can make money inside the policy fast enough, you can have a bigger investment portion and have enough money to pay the very high term premiums later in life. Of course if your investments don’t grow fast enough you’re going to end up with a very very expensive life insurance policy later in life when it’s likely too late to do anything about it. Secondly, the investment portion of Universal Life is generally not guaranteed. The old adage ‘past results are not indicative of future returns’ applies in spades. Be careful when evaluating Universal Life insurance scenarios that depend on non-guaranteed portions of the contract.

One last note about Universal Life insurance. If you are looking at permanent insurance, Term to 100 is generally where I’d start shopping as we’d expect that to be the least expensive. For competitive reasons though, sometimes the Term to 100 insurance component inside a Universal Life policy may cost the same or less than buying the Term to 100 policy discretely. It’s worth pricing out a Universal Life policy when looking at Term to 100 just to get the cost differential. If it’s minimal – and in many cases it is – you should consider the Universal life policy. Even if you treat it as a Term to 100 policy and ignore the investment portion, you’re getting the ability to use that feature in the future for little cost.

In summary, the conceptual basis of all life insurance is 1 year term. Averaging out the premiums gives us products like 10 year term and 20 year term which work well for 10 or 20 year needs and is suitable for many people. For people with longer term insurance needs permanent insurance fits the bill. There are three types of permanent insurance; whole life which has fallen out of favour with consumer advocates, Term to 100 which is a stripped down version of whole life without cash values, and Universal Life insurance which is Term to 100 life insurance with an investment vehicle added to it.

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Life Insurance Types – Whole Life and Term to 100

by Glenn on June 30, 2008

This is part 2 in a 3 part article intended to make the types of life insurance less confusing.

These three articles should be read in order.

  1. Life Insurance Types – Term life insurance
  2. Life Insurance Types – Whole Life and Term To 100
  3. Life Insurance Types – Universal Life Insurance

(Continued from previous article)

Enter permanent life insurance. There are three basic types of permanent life insurance but they share one common feature. They all have level premiums for life.

Effectively what the insurance companies do is average the premiums for the 1 year term product, but over your entire lifetime. We end up with one premium, that while substantially higher than the 1 year term, will never go up. Later in life when the term premiums increase to the point of unaffordability, permanent life insurance purchasers will still be paying the same premium they were paying when they first bought the policy – eventually permanent premiums become less expensive than term.

What you’re really doing (and I’m being conceptual here) is overpaying your premiums above the true cost of insurance, or the 1 year term. The insurance company then reserves that overpayment in premiums you make in the early years. Eventually when the actual cost of insurance and the claims they’re paying out exceed what you’re paying for permanent insurance, they can make up that difference in premiums out of their reserves they’ve built up – using your overpayment in premiums from the early years. This concept works well for those needing permanent insurance.

Now what happens if you cancel your policy early? You’ve overpayed your premiums for future use, which now you’re not going to use. The insurance company will refund you a percentage of your overpayment in premiums. This refund is called a Cash Value. And this product – level premiums for life, with cash values if you cancel your policy early – is called Whole Life Insurance.

Unfortunately through the years the insurance industry has decided to sell this refund of overpayment of premiums as a great savings vehicle when it really isn’t. Consumer advocates realized this was a crappy deal for consumers (who for the most part just needed some cheap term life insurance). So Whole Life Insurance got a deservedly bad rap.

The insurance companies had a response to this. They took a permanent insurance policy and removed the cash values. This allowed them to lower the premiums. This product – level premiums for life with no cash values if you cancel early – is called Term to 100 Life Insurance.

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Life Insurance Types – Term Life Insurance

by Glenn on June 30, 2008

This is part one in a 3 part article intended to make the types of life insurance less confusing. These three articles should be read in order.

  1. Life Insurance Types – Term life insurance
  2. Life Insurance Types – Whole Life and Term To 100
  3. Life Insurance Types – Universal Life Insurance

Note: You can run a term life insurance quote in the right sidebar of this site.

I speak to many people about life insurance every day and one common theme I see is complete confusion over what the various types of life insurance are. Some folks have read up on what the consumer advocates have to say and demand only term life insurance regardless if that’s what’s best. Others just have to have something where they ‘get their money back’, again regardless of whether that’s the best deal or even the right type of insurance. Ultimately I believe this confusion stems from the insurance industry selling products using wild and colorful presentations that focus on just about everything but the insurance aspect. Consumers are confused and skeptical of being sold the wrong type of life insurance.

There’s a fix to that. Quit treating life insurance as a financial product and start treating it as an insurance product. Life insurance is insurance – not a savings or investment account. It’s generally not a tax saving strategy either (occassionally it is – but it’s only a solution to tax problems if you actually already have tax problems. Are you seeking a solution to your tax problems?). Look at life insurance the same way you would your car insurance. Would you consider saving for your children’s education via your car insurance? Do you want all your premiums ‘back’ from car insurance as a savings plan? Of course not. And that’s because we all know our car insurance is an insurance product not a financial product.

In fact, at it’s core life insurance works very similar to car insurance. We pay a premium for a year. If we have a claim (we die) the insurance company pays the benefit. If we don’t have a claim the insurance company uses our premiums to pay the claims of whoever did have a claim. That’s simple enough.

Just like car insurance, if we’re a bad driver our rates go up. What primarily makes us a bad driver with life insurance is our age. Every year we’re a year older, we’re a year closer to dieing. So the way pure life insurance would work is we’d pay a premium for a year and have our coverage. Next year our rates would go up a bit, as they would every year thereafter. Eventually the insurance premiums would be out of site since we’d be such a bad driver (we’d be old).

The product just described does exist. It’s called 1 year term life insurance. It’s 1 year term because the rates go up every year. It’s term life insurance because there’s no bells or whistles or cash values in the policy and the rates basically follow our age. The problem with this product is that no one will buy it. Who’s going to buy a life insurance product where they know the rates are going up every year and eventually will be too expensive? Nobody.

So what the insurance companies did is take the rates over 5 years and figure out the average premium. Using that average premium, they can now provide a product where the rates are level for 5 years, then they go up and again are level for another five years, and so on – basically staircasing upwards every five years. That product is called 5 year term life insurance. 10 year term, 20 year term life insurance, they all work in the same fashion.

If you’re younger and raising a family and need a lot of insurance, term insurance fits the bill. A 20 year term life policy will give you level rates for 20 years; generally long enough to get the kids mostly out of the house and pay down the mortgage. And since the premiums are based on your age and you’re not paying for cash values or other features, it’s pretty much the cheapest type of life insurance available.

However even with 20 year term premiums going up every 20 years, they will eventually get too expensive (in fact most term policies expire around age 70 to 80). So while longer term life insurance is great for many folks, there are some folks who have life insurance needs no matter when they die – 50, 80, 99, or 120. For those folks term life insurance simply won’t work, the premiums will eventually be unaffordable.

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Renewable Term Life Insurance – Part III (A warning)

by Glenn on June 27, 2008

In the first post on this topic I mentioned how the first level period of a term insurance policy is priced using the cheaper ‘select’ table. Future renewals are then priced using the much more expensive ‘ultimate’ rates table. The underlying difference is that the select table rates are for people who have just taken a medical and proven their health. After 10 or 20 years without a medical exam the average health of insureds starts to look like the general population – the insurance company no longer knows if you’re still healthy and prices accordingly.

HOWEVER! It didn’t use to be this way. Older term policies purchased in Canada prior to the mid 90’s or so were far, far better. If you have a term policy prom that period or prior, you should think long and hard before you cancel it for a newer policy. These older policies were far superior than current policies.

The difference was the renewal premiums. Older term policies used the ‘select’ rate tables for the first level premium period…and for future renewals. That’s right, at renewal you would receive the same rates as someone who’s just taken a medical exam, but without taking a medical exam.

For example, a 30 year old who bought a 10 year term policy would initially receive select rates. Upon renewal at age 40, their new, higher rates would be based on someone 40 years old who had just taken a medical exam and proven their health – they would receive ‘select’ rates for a 40 year old (and all of this would normally be fully guaranteed until the policy expires). Contrast that with a current term policy where the premiums at age 40 skyrocket since the insurance companies assume you’ve not taken an exam and are potentially unhealthy. In other words, the old policies have pricing similiar to current policies assuming you take a medical exam every 10 years – without having to take the medical exam.

Unfortunately in the 90’s a few American insurance companies entered into the Canadian marketplace. They brought with them lower pricing on the initial premiums, but at the expense of a number of things Canadians were used to in their term policies. Moving from only using the select rates for initial and renewal premiums to only using select rates for the initial premium and ultimate rates for renewal premiums was one of the sacrifices to policies that Canadian insurance companies had to make to remain competitive on the initial premiums.

In summary, if you have a term policy from the mid 90’s or prior, make sure you don’t have one of these older style policies before letting it lapse or cancelling it. You won’t be able to buy a policy with renewal premiums like that again.

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Renewable Term Life Insurance – Part II

by Glenn on June 27, 2008

In my previous post I discussed how term policies in Canada are technically renewable but the higher renewal premiums mean that for most of us the policy won’t be renewed. Let’s look at what our options actually are upon hitting the first renewal period for your term life insurance policy.

  1. You’re healthy and still need the insurance. Well, that’s simple enough – shop out the life insurance (you can use the quoting system on the right side of this page), take a new medical exam and buy a new policy from whatever company is currently offering inexpensive prices.
  2. You’re healthy and don’t need the insurance. Well, I guess you might want to drop the insurance. If there’s no current or future need for insurance, no need to pay for it. In my experience though, this is rarely if ever the case.
  3. You’re unhealthy. If that’s the case, even if you don’t immediately need the insurance you probably still want to keep it. If you know you’ll either never get life insurance again or only at greatly increased premiums, then hanging on to your existing policy is probably a good idea achat cialis generique. But that leaves you with the prospect of those horribly high renewal premiums – the ‘ultimate’ rate tables. Yikes! But there’s a solution that will allow you to go back to the ‘select’ rate table without taking a medical exam. This is called the conversion priviledge and I’ll discuss it in detail in a future post. Most but not all companies in Canada offer this conversion priviledge at no cost. I recommend you only ever purchase a term policy that has this conversion priviledge.

Now this might seem that the thing to do is to buy a term policy then take a new medical every few years. In fact, that’s not the proper approach. The problem with this approach is that you are assuming the risk of being able to take a new medical exam in the future. Instead, make sure you buy the proper length of term insurance. If you need insurance for 20 years, buy 20 year term instead of 10 year term twice, with a medical exam in year 11.

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