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.

Full document is here.

Update 2: The rating agency AM Best has downgraded AIG Life Insurance Company of Canada from A+ to A as of yesterday (September 15).

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The internet wires are humming with news that AIG (American International Group) in the US is struggling. See this article in the Wall Street Journal.

That begs the question - what about us Canadians who have policies with AIG Life Insurance Company of Canada? Should be be concerned? Are we protected? What do we do?

Well, the short answer is that we’re fairly well protected. In the words of The Hitchiker’s Guide to the Galaxy, Don’t Panic! Keep your head even when others are losing theirs. There’s very little if anything to worry about even in the most dire of circumstances. The worst case scenario isn’t that bad, and the probably outcome is that we won’t be financially affected at all.

In addition, as it stands right now it seems there isn’t any problem at all with AIG Canada. The pdf document from AIG posted above indicates pretty clearly that they’re not in any financial difficulties.

Guarantees:

Let’s start with the guarantees and assume worst case scenario that AIG Life Insurance Company of Canada gets taken down along with American International Group in the US. All the life insurance companies in Canada (including AIG) belong to an organization called Assuris. Assuris provides some pretty robust base guarantees for life insurance polices:

1. Death benefits are guaranteed to the higher of up to $200,000 or 85% of promised coverage.
2. Cash values and investment values are guaranteed up to the higher of $60,000 or 85% of current value.
3. Policies will be transferred to a solvent insurer.

Worst Case Scenario - life insurance coverage:

Since we’re assuming worst case scenario here, let’s assume that AIG in Canada goes belly up and these base Assuris guarantees kick in. If your life insurance amount is less than $200,000 you are fully guaranteed. If you’re investments or cash values are less than $60,000 again you’re fully covered. So, the guarantees look after you completely.

Now lets say your insurance amount is over $200,000 and Assuris only provides the minimum guarantee of 85%. Well, you’ve just become exposed to the risk of 15% of your life insurance coverage if you die. I’m going to venture to say that the 15% isn’t a complete catastrophe for you. Now, if you’re healthy all you need to do is purchase new coverage for that 15%. There’s no need to dump the current 85% because that’s going to be transferred to a solvent insurer right? So you’re going to possibly pay a bit higher premium for a small fraction of your coverage.

If you’re not healthy so you can’t purchase additional insurance, you can always purchase no medical exam life insurance. Again this would be at a higher premium. It’s going to cost you a bit, but is this devastating? Not at all.

Worst Case Scenario - Cash Value and Investments in Life Insurance Policies:

Now let’s look at your cash value and investments in your life insurance and again assume absolute worst case scenario. If you’re investments or cash value are less than $60,000 you’re fully covered, nothing lost. If it’s higher than $60,000 you could potentially have just lost 15%.

Now that’s certainly not good news. But is it catastrophic? I’d say it’s not - it’s really not even as bad as many people suffer with their investments through things like tech bubbles and poor investment choices.

So yes, you could lose 15% of your cash or investments inside a life insurance policy. But that’s it - the other 85% is guaranteed by Assuris and backed by all the other life insurance companies in Canada.

Summary - worst case scenario:

In summary, the worst case scenario is that most folks will be entirely covered, the remaining few will on be mildly affected and can likely manage themselves back to full protection at minimal relative cost.

Probable scenarios - looking forward using the rearview mirror:

In the best practices of fund managers, I’m going to suggest we use past experiences to guide us in what is likely to happen in the future. There have been three life companies go bust in Canada.

Les Cooperants went bust. Policyowners were eventually 100% covered.

Confederation Life went bust. Policyowners were eventually 100% covered. And Confederation Life was one of the top 5 biggest companies in Canada at the time - and still, 100% coverage.

Sovereign Life went bust. 96% of policyowners were 100% covered. The remaining 4% of policyowners recieved a minimum of 90% of their benefits. So almost everyone received full benefits, a small fraction received the vast majority of their benefits.

So given past experience, it’s a reasonable assumption that AIG policyowners are likely to escape with 100% of their benefits. The only change is no change.

Full stop! We’re still speculating here folks!

It’s worth noting that not only is AIG in the US not bankrupt, but we have as of now no word that this even effects AIG in Canada - and if it does, how it affects AIG. In other words, any concerns surrounding AIG in Canada are at the current time unsubstantiated.

One of the things that may come out of this is how tightly AIG in Canada is tied to AIG in the US. DIfferent companies have different ties to their parent companies. It’s possible if AIG in the US falls (and again - that’s speculation at this point) that it may take AIG in Canada down with it. Or, AIG in Canada may be discrete enough of an entity that it remains fully viable - little effect on it. Even if AIG in the US falls (and again - that’s still an IF at this point), AIG in Canada may be just fine.

In fact, in the release from AIG posted at the top of this post it seems AIG Canada is saying that they’re a seperate legal entity. I think we’re supposed to take from that that they stand on their own, mostly seperate from the US company. And that makes this entire discussion a bit of a moot point - AIG US can do what it wants and AIG Canada will still roll merrily along.

Next step - Men in Black Suits step in:

If AIG in Canada is substantially affected by some potential future demise of it’s US parent, the first thing that’s likely to happen is the government and Assuris are going to step in and take things over. This is a good thing. Both the Canadian regulatory authorities and Assuris will have nothing other than the financial concerns of Canadians at the forefront of whatever they do. I appreciate we wouldn’t normally associate ‘best interests of consumers’ with service from a government authority but this is one case where I wouldn’t want to be standing between them and the best interests of getting consumers their money fully protected. I expect these folks will use the full authority of the government and the industry to move whatever they have to protect policyowners.

It’s also worth noting that I don’t see AIG Canada just going bankrupt one day. The government keeps a tight eye on our insurance companies and keeps a tight eye on what’s going on. They’re going to step in long before the company is reduced to ashes. I expect they’ll step in at the first signs of trouble and manage it back to viability again.

Big companies looking for deals:

The larger insurers are still cash flush and looking for buys. The Canadian market is pretty much tapped out in terms of companies they can buy so they’ve focused their efforts into the US. There’s been recent news reports that some of the larger Canadian insurers are excitedly circling some of the remains of US companies who are in trouble - it’s an opportunity for our insurers to expand.

If AIG flounders and there’s an opportunity for insurers to pick up the business I expect Canadian insurers are going to be rushing in to get the business. It’s possible we see a competition or bidding atmosphere. And that can only be good for policyowners.

So what’s probably going to happen:

Assuming AIG in the US goes bust. And assuming that affects AIG in Canada to the extent that they become insolvent
and the government steps in. What do I expect to happen? What’ll happen is that two or three large insurers are going to bid on the business, and AIG policyowners are going to end up with 100% coverage and unaffected.

So Don’t Panic. We’re going to be fine :).

Most people believe that their company benefits will pay them in the event of catastrophic costs. And most of these people would be flat out wrong. The reason is that many (perhaps even most) health and dental plans have a cap on the benefits. The cap varies by company, but you can expect to see it being something in the low thousands of dollars. If you run into healthcare costs higher than that - if things go really wrong - then you’re going to find your health plan not paying anymore.

In Canada we have a couple of ways we can address this huge gap in our coverage. The first offset is through government assistance. Many of these expenses would be tax deductible. And some provinces have special assistance programs where you receive coverage after a certain amount of your income is spent on drugs. Both of those things, where available can help you to cover potentially high drug costs.

However there’s another way to cover this risk as well. It’s called stop-loss insurance. Basically what stop loss insurance is is very high deductible health and dental insurance. For example, stop loss insurance may not cover anything for the first $5000 of costs, then cover everything after that. It’s intended for the really catastrophic eventualities, not for the everyday antibiotic drugs or your annual dental cleanings.

Stop loss insurance is perfect for anyone who mistakenly believes their group insurance coverage at work is going to look after them in the event of catastrophic costs (your plan likely doesn’t have this coverage - you should check). It’s also great for self employed folks or folks who don’t have any health and dental benefits and who are currently paying these costs out of their pocket. From an insurance perspective it’s fine to pay your own health and dental costs for the smaller amounts (though there may be some tax advantages to having a plan) but you should make sure you are satisfied with your coverage for the potential high cost losses. And that’s where stop loss fits the bill.

There’s probably a couple of companies that offer this type of stop loss coverage. Personally since we’re self employed, we just use Manulife’s coverme plan. They have a policy called ‘FlexCare Catastrophic Coverage‘ that is effectively stop loss coverage. This policy covers all your generic drug costs after the first $4500, along with a few other things. The first $4500 of costs would have to be covered out of your current health policy or out of your pocket.

I just ran a quick quote on their site for a family of four, 40 year olds with a couple of kids around 10 years old. Premiums for that case were less than $50 a month. Well worth the piece of mind in this case, particularly at that price.

And every year, that brochure is intimidating. It folds out to like 3 feet long of very fine print in all technical insurance terms. Well, I exaggerate a bit - but there is more information in that brochure than most of us are going to want to read in one sitting. It’s hard to tell what’s covered, if it’s worth paying for what’s covered, and what’s not covered.

In addition, there are 6 different levels of plans (Basic, Plan 1,2 and 3, Super Plan, and Super Plan Plus). On top of any of those you can purchase an additional permanent disability option of $100,000 for $7 per child.

Being in the insurance industry (though I don’t provide this type of insurance myself) I have read the entire brochure and looked at the prices. And while the likelihood of a claim is small, the consequences can be severe. Plus, I figure that kids are relatively prone to accidents of just about any kind we can imagine. In addition, the costs for this insurance plan are relatively low - and upgrading to the higher amounts of insurance costs only a few dollars.

My recommendation? Purchase the Super Plan Plus for all of your school aged children. For our two children this cost $53.00 per year.

I did not purchase the Additional total permanent permanent disability option for $100,000 at $7.00 per student - but I recommend that you consider it. I felt that the premium was a bit rich in comparison to the rest of the coverage, but that’s not to say that $7 a year for $100,000 of total disability coverage is overpriced by any stretch.

AM Best is an American company that comes in and evaluates insurance companies. They then assign them a letter like A+ or B-. I take it we’re to assume that this is indicative of the future strength and stability of the company right? Well, maybe not so right. AM Best seems to disagree with that premise, from their web page:

These ratings are not a warranty of an insurer’s current or future ability to meet its contractual obligations, nor are they a recommendation to buy, sell or hold any security. A.M. Best Company is not engaged in the offer or sale of any security and does not provide investment advice of any kind. Further, any and all ratings, opinions and information contained herein are provided “as is,” without warranty of any kind, express or implied. A.M. Best receives compensation for its interactive financial strength ratings from insurance companies it rates.

So what are they implying or saying with the ratings? I’m not sure. But they’re for sure explicitly telling you they’re not suggesting you use it as a warranty of future strength. In fact two weeks before Confederation Life went out of business they enjoyed AM Best’s top rating. So I certainly don’t suggest that you disagree with them and start buying life insurance based on AM Best ratings.

Now, this isn’t to slam AM Best. It’s a fine company (really it is. I speak from first hand experience. They’re great folks). But the perception by consumers and agents (who I think to some extent use these ratings to justify the sale of ‘their’ company over another) should probably be changed.

In addition, I’d suggest you have another look at the last line of the above quote. Yes, that one that talks about cash changing hands. Yes, the insurance companies pay AM Best for ratings. Well, not all do. Some don’t pay AM Best for ratings and as a result don’t have an AM Best rating. And all that means is that they’ve decided not to pay AM Best. Nothing else should be taken from that.

As for an agent determining that an AM Best rating is good or bad, there’s nothing in an agent’s training that qualifies them to understand it. Even many actuaries would have to do some real head scratching to get a handle on what’s going on with the underlying calculations of the ratings.

And of course, there’s even more factors to consider that in my opinion have a lot of bearing on whether a company would end up in a situation where they couldn’t pay a claim.

First, many Canadian insurance companies are owned or offshoots of larger US international companies. Has the parent company agreed in writing to back any problems with it’s Canadian subsidiary? It’s my understanding that some do, some don’t. So if you’re dealing with Big Company A and they go bust but are not backed by their Monster US Company A parent, then being a household name didn’t help anything. But if Small Company B is actively backed by it’s parent company, and Small Company B goes out of business you’re still safe because it’s US parent is going to look after you. Shouldn’t that be of more concern than a letter rating?

Secondly, many companies deal with reinsurance companies (and I think perhaps the reinsurance companies may be incestuously related back to some of the insurers). So if you buy $500,000 of life insurance through a small company (or even a big one - they almost all do this), they may keep $100,000 of the risk and pay the reinsurance company part of your premium to be on the hook for the remaining $400,000. If that’s the case, are you better off with a company where your life insurance would be paid $100,000 by them and $400,000 through some huge international reinsurance company, or would you be better off with a company that is on the hook for the full $500,000? Tough to say, but I think we could make the case that the small company sharing out the risk isn’t a bad thing for us.

Now there’s another wrinkle. In Canada we are fortunate to have Assuris. This is an association of most of the life insurance companies in Canada and they jointly guarantee your life insurance benefits up to a certain amount (generally speaking, the greater of $200,000 or 85% of your insurance). So unless the whole industry goes belly up the worst you’re likely to lose is 15%. Not great, but probably not entirely catastrophic.

But here’s the real kicker. There’s never been a consumer in the history of Canada lose a dollar on life insurance death benefits. Not ever. The two times a company has gone out of business, the other companies scooped up their blocks of business. They did this I think partly so that I can continue to state that nobody’s ever lost a dollar. The strength of the industry is important to the industry.

So how’s a consumer to judge? Agents aren’t qualified. There’s no easy yardstick to measure stability. Reinsurance treaties and agreements with parent companies muddy the waters. And we’ve got Assuris backing us up anyway. Well, it’s my belief that for the most part consumers should not concern themselves with this. The industry is highly regulated by the government as well and while we can disagree that the government does a good or bad job on many other things, it’s my opinion that they watch the financial industry very closely.

Here’s my take on this. First, I believe the life insurance industry in Canada is solid and there’s little reason for most of us to make strength a factor in our buying decision. Secondly, we have the guarantees of Assuris backing us. If you shop out the companies by their rates (which you can do in the top right hand corner of this website), see who comes in the least expensive. If there’s a larger company that’s just a dollar or two more than a smaller company, and if you feel comfortable paying that extra couple of bucks to get a big company, then I think you should do so. If you’d prefer to save the couple of bucks, I think that’s a great idea too. Just be aware of what it is you’re doing (i.e. don’t discount other companies just because of some vague reference to ‘A+ companies’ or some other malarkey).

If you have a large policy you’re shopping out, then just to be squeaky safe I would suggest considering the larger companies. And you might consider splitting the policy up amongst a few life insurance companies. But that’s about as far as I would get concerned with strength.

The Canadian life insurance industry in my uninformed opinion is rock solid. I’m not in the least worried. In fact, my personal insurance is with a smaller company.

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.

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.

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.

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.

http://blip.tv/file/1030864

Not surprisingly the ad uses a bit of shock value to get you to think about life insurance. They’re trying to get you to think about dying and thus want to buy life insurance. In the life insurance industry this practice is known as ‘driving the hearse up to the door’. I don’t particularly like the practice as I prefer to be more factual and financial on the purchase of life insurance than emotional.

Nevertheless the video is an interesting perspective on family and children; from that angle it’s a great video. Reminds us that we’re all gone at some point and our kids will leave sometime too - so treasure the time we have together and ensure you have no regrets.