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Types of 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).


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 dapoxetine priligy. 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.


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.