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.

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.

The initial response to that would be yes - if you are willing to pay a slightly higher management fee in return for the guarantees we get with seg funds. But there’s at least one thing to consider before doing this - when should you make the switch?

We know that seg funds have minimum guarantees on your deposits (which would include your initial transfer). What isn’t normally guaranteed directly is your growth.

Now let’s assume that your investments will recover from their current abysmal level. Note that the markets generally correct or come back in fast spurts - over the course of a day or so, not over months. You’ll wake up one morning and it’ll be mostly back.

Let’s say you had $100,000 last year in mutual funds. Right now you’ve got $60,000. We expect it will return to $100,000 at some point in the future (that’s a basic underlying principle of the markets).

Now if you make the switch to seg funds now, your guarantees will be based on the $60,000. When the markets return, the growth of $40,000 isn’t generally speaking included in the guarantees.

However if you wait until your mutual funds return to $100,000 and then transfer over to a seg fund, your guarantees in the seg fund will be based on $100,000.

What to do? There’s no general answer to this as it depends on whether you believe your mutual funds will come back given your current investments, it also depends on some of the insurance companies’ seg guarantees. And the length of time you have until your maturity date should be considered as well - can you wait for your mutual funds to recover?

Like many things in the markets what we should do is the opposite of what we want to do. The best time guarantee-wise to move from a mutual fund to a seg fund is when markets are high, to lock in those guarantees. However the time most people want to trade off the higher fees for the guarantees is when the markets are low.

Seg funds all have a minimum guarantee, but these guarantees vary by company. The following is a brief outline of what I would consider to be the basic guarantee (some companies may provide better).

When you invest in a seg fund you will select a maturity date. This is generally age 71 (the age the government requires you convert your RRSP to a RRIF). The base assumption would be that the guarantees kick in at that time.

At maturity, all deposits that were made 10 or more years ago are 100% guaranteed. Any deposits made in the last 10 years would be 75% guaranteed.

Let’s say you’ve been investing for 20 years. In the first 10 years you invested $100,000. In the last 10 years you invested another $100,000. If your investments have crashed to the point where you actually have less than that initial $200,000, the guarantees will kick in - the insurance company will actually top up your investment. So the first $100,000 will be topped up completely, and the second $100,000 will be topped up to a maximum of $75,000. So worst case scenario at the maturity date would be a guarantee of $175,000.

The same guarantee is available at death.

A few more points. First, this is only a general idea of how the guarantees work for seg funds. All the companies have their own base guarantees, similiar to but different from the above. There are also additional complications like ‘resets’ from some companies that allow you to lock in your growth (basically saying that as of today, all your growth is treated as a new deposit, thus in 10 years the minimum guarantee would apply to your funds’ current amount).

Mutual funds do not offer this guarantee. As I noted previously, seg funds commonly have slightly higher fees. You’ll need to review the difference in fees with the guarantees to see if seg funds are right for you.

Seggregated funds (or Seg funds) are basically mutual funds offered by life insurance companies. There are some fine technical differences (you’re not investing in the underlying funds, you’re investing in the seg funds which holds units in the funds) but effectively, they pretty much look like mutual funds.

There’s two important differences between seg funds and mutual funds though. First, seggregated funds generally have higher MER fees - the costs are a bit higher. Secondly, seg funds have base guarantees of capital. That’s right - unlike a mutual fund, seg funds offer guarantees of the capital you invest into the seg funds. These guarantees may not be 100% (though in many cases they are 100%) and they kick in after a length of time, generally 10 or 15 years.

The question is - are you willing to pay the slightly higher MER fees in exchange for those guarantees? That really depends on your aversion to risk. If you don’t care about the volatility of mutual funds, take the lower costs. If you prefer some basic guarantees on the money you put in, consider seg funds.

BMO will merge AIG’s operations with their own. And by ‘merge’ I mean if you work at AIG, you’d best get your resume sent over to Manulife tout-suite. The end result, they’ve bought the block of business but going forward AIG life insurance operations in Canada as an entity are gone.

The reason I say this is good news is that for existing policyholders this likely means business as usual - except now if you’re an existing AIG life insurance client your policies should basically be moved over to BMO for administration with no other changes (including changes to premiums and any other contractual provisions). In short, your life insurance policy should be just like it was before but now backed by BMO instead of AIG. That’s good news.

It’s also good news for those of us in the life insurance industry because it removes a source of uncertainty from the industry and shows once again that the business is stable.

Update: Here’s the link to the announcement from AIG.

Update 2: I also wanted to comment that this points to only good things about the Canadian life insurance industry.  Not only was AIG in Canada in good shape despite their parent company’s problems, but look how fast the company was snapped up by another insurer.  The regulators seem to be doing whatever they need to to ensure the industry is strong for consumers.

This currently is the only calculator of it’s kind online at this time.  Other Tax Free Savings Account calculators merely show how the tax deferred growth is beneficial, they don’t actually compare to deposits made into a Registered Retirement Savings Plan.  This new calculator however, shows deposits and growth, then the effects of taxation on withdrawals after retirement. It helps answer the question ‘Will I have more money at retirement if I invest in a TFSA or if I invest in an RRSP?’.

The easiest way to grasp how they work is by thinking of them as an RRSP then comparing the differences and similiarities.

Like an RRSP, a RDSP is a type of longer term savings account administered typically by financial institutions like banks and insurance companies. With an RDSP, the disabled individual or their legal rep would open an RDSP account at one of these financial companies.

Unlike an RRSP though, family members of the disabled individual are the ones that can make contributions. Also unlike an RRSP, contributions made into an RDSP by a family member do not qualify for a tax deduction.

Similiar to an RRSP though, RDSP’s accumulate interest on a tax sheltered basis. So as the plan grows and earns interest, that interest is not taxed as long as it stays in the fund.

In addition to deposits made into the plan by family members, and the growth of that plan going forward, there are two other types of income available for the fund; Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB). These two supplements are paid by the Canadian Government into the fund. The exact amount of those supplements are based on family income.

Like an RRSP, taxation occurs when the money is withdrawn from the fund. When money is withdrawn, original deposits from family members are not taxable. But interest, CDSG and CDSB are taxable in the hands of the disabled individual.

Here’s some further reading on Registered Disability Savings Plans:

About RDSP’s

Canada Disability Savings Grants and Canada Disability Savings Bonds

RDSP Frequently Asked Questions

And finally, how do you proceed to set up an RDSP? I recommend a two step process. First, speak to your accountant to discuss the specifics of this financial vehicle as it relates to you specifically (CDSG and CDSB for example are affected by family income) and discuss things like amounts of deposits. Armed with that information, you can then contact your financial advisor to set up a plan for you at an appropriate institution.

UPDATE:  Two more excellent links on RDSP’s:

RDSP Blog

RDSP.com including an RDSP calculator

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).

AIG Life of Canada today released a document to it’s partners, a copy of which can be read here.. Two things it points out. First, the US government has bailed out the parent company in the US.

Secondly, as part of that bailout they expect to sell off their non-core businesses off, including quite likely AIG Life insurance Company of Canada.

SO! AIG Life insurance Company of Canada is for sale. And who’s big enough to buy them?

Manulife.

Manulife is now the largest life insurance company in the world (since AIG’s decline). They seem to be weathering this financial crisis just fine. Furthermore Manulife has a voracious appetite for buying life insurance companies. Well, they call it ‘merging’ but when Manulife ‘merges’ with another life insurance company, the resulting company is always called ‘Manulife’ :).

In the last couple of decades Manulife has bought just about every Canadian life insurance company that could be bought. And they’ve bought aggressively into the US as well - John Hancock being one example. Unfortunately the list of companies available to be taken over has shrunk to virtually nobody recently. The opportunity to take over a large block of business in short order likely has the execs at Manulife rubbing their hands with glee.

There’s your speculation for the day. We know AIG is up for sale, we know Manulife is big enough and bad enough to buy them out. And ultimately should that transpire that can only be good for AIG policyholders.

(*) Manulife buying out AIG is pure speculation on my part. I bet I’m right but it’s speculation nonetheless.