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term life insurance

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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Renewable and Convertible Term – The Conversion Priviledge

by Glenn on July 17, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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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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Father and Son Life Insurance Video Ad

by Glenn on June 28, 2008

I came across this video ad on life insurance for father and son. It’s quite touching.

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 suivant. 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.

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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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Life insurance for stay at home moms

by Glenn on November 29, 2007

This is a question that comes up frequently – how much life insurance should a stay at home mom buy?

Well, there’s no firm answer; or more appropriately there’s no answer that can be easily calculated. However we can make some educated estimates as to how much life insurance you should be considering. In a situation like this I prefer to think in ‘ranges’ with an upper and lower amount selected. Then you can choose where in that range you feel most comfortable.

The first thing to consider (and this is true for anyone purchasing life insurance) is what exactly is lost. Once the loss is determined we can start to estimate how much life insurance is needed to cover that loss.

With stay at home moms we don’t neccessarily lose any direct income. What is lost however is the value of the work done by stay at home moms. And that is something we can use to start to estimate how much life insurance you need. To replace the work done by a stay at home mom, you’re typically going to be looking at least at daycare, and quite possibly a homemaker. Now lets say we need to pay $25,000 a year for a homemaker (and that’s likely on the low side). Using a how much life insurance do I need calculator I can see that replacing $25K for 25 years and assuming 3% inflation and 5% interest, that it takes just over $500,000 of life insurance to produce that income. And that’s with nothing extra or left over.

On the lower end of the scale that same calculator shows that if the same assumptions are made but over 15 years then $328,000 of life insurance is needed to produce that income.

So now we’ve got a range, based on some assumptions. In this case you should be looking at between $325000 and $500000 of life insurance for a stay at home mom. And that fits in with what I typically see – most stay at home moms that I work with are looking at between $250,000 and $500,000 of life insurance.

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Term Insurance vs Whole Life Insurance

by Glenn on November 11, 2007

This question is often raised – is whole life or term life insurance better?

The answer is not quite as easy as that – it’s both and neither. Consumers who compare product types at the front end of a buying decision like this are risking either overpaying or buying the wrong type of insurance.

The answer to this is that the product should not drive your decision. The reason you’re buying life insurance should dictate the type of life insurance you buy. In other words, determine why you are buying life insurance and that will point you at the type of life insurance that is ‘better’ for your situation.

Term life insurance is less expensive than whole life insurance when you first buy it. It also expires or lapses (it’s called ‘renewable to’ by the industry) at a future age. Typically that’s between ages 75 to 85 for most Canadian companies. And term insurance premiums increase at set intervals (every 10 years for 10 year term life insurance for example).

Whole life is a subset of ‘permanent insurance’. Permanent insurance in Canada encompasses three types of life insurance; whole life, term to 100, and universal life. Permanent insurance premiums will be more expensive than term insurance initially but the premiums do not increase generally speaking. If a term and a permanent insurance policy were purchased at the same age, eventually the term life insurance premiums would increase past the permanent insurance premiums. At that future point the permanent insurance would actually become cheaper. And over the long haul, the total premiums paid for a permanent insurance policy should be less expensive that term life.

So which product should you buy? Again, that depends on your needs. Lets say you have a young family, mortgage, and other expenses. That means you’ll need a fair amount of coverage right now, and likely inexpensive premiums are a priority – cheaper ‘now’ is more important than ‘cheaper over many years’. In that case term insurance would be a better match. The future premium increases are offset by the assumption that you will need less insurance in the future as your mortgage is paid down, the kids leave home, and so on. In this scenario you are trading the risks of that future need decreasing and the future premium increases in exchange for cheaper premiums now.

If on the other hand you have estate needs, taxes due upon death, or want burial insurance, then you have a situation where you’ll need life insurance no matter what age you die at, and a need that does not decrease. In that case some form of permanent insurance would typically be recommended. You’ll pay higher insurance premiums now but they will remain level for life. As you age, those initially high premiums will start looking very cheap in comparison to what term premiums become in the future.

There’s also a third option – a blend of both. It’s possible to buy a permanent insurance base plan with a term insurance rider to top up the amount of insurance. For example you could buy $100,000 of permanent insurance with $400,000 of term insurance rider. That would give you a total of $500,000 of life insurance initially. Then as your needs decrease you can drop or decrease the $400,000 of term insurance rider and still keep the $100,000 of permanent life insurance. This combination of insurance types in one insurance policy is another viable option for those looking for a blend of high insurance amounts now but seeking insurance to cover final expenses in the future.

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