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whole life insurance

Life Insurance Types – Whole Life and Term to 100

by Glenn on June 30, 2008

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

These three articles should be read in order.

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

(Continued from previous article)

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

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

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

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

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

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

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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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