Money Concepts Whitby

Types of Life Insurance

• Term Insurance
• Permanent Insurance
  • Whole Life
  • Universal Life
  • Term to 100
• Specialty Insurance
  • For Women Only
  • Critical Illness
  • Mortgage Insurance
  • Final Expenses
  • Guaranteed Issue

Choosing a life insurance product is an important decision, but it can be complicated. As with any major purchase, it is important that you understand your family's needs and the options open to you.

There are many kinds of life insurance, but they generally fall into two categories: term insurance and permanent insurance.

Term Insurance

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the term, which can be from one to 20 years or to a specific age i.e. age 65. The premium rates increase at each renewal date.

The following points can help you determine if Term Insurance best suits your needs.

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Permanent Insurance

Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, this may be the wrong type of insurance for you.

Permanent policies are known by a variety of names: whole, ordinary, universal, adjustable, and term to 100. Most have a feature known as cash value or cash-surrender value. This feature, not found in most term insurance policies, provides you with some options:

• You can cancel or surrender the policy in total or in part and receive the cash value as a lump sum. If you surrender your policy in the early years, there may be little or no cash value.
• If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime.
• You usually can borrow from the insurance company, or a bank using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

With all types of permanent policies, the cash value of a policy is different from the policy's face amount.

• The face amount is the money that will be paid at death or policy maturity.  Face Amount is the amount of insurance that you have bought.
• Cash value is the amount of the value of the investments or savings accumulated inside the policy and is available if you surrender a policy before its maturity or your death.   On Death Cash Value can be paid to your beneficiary in addition to the face amount of your policy.

There are basically three types of permanent insurance:
Whole Life Insurance, Universal Life Insurance and Term to 100 Insurance.

Whole Life Insurance.

Whole life or ordinary life is the most common type of permanent insurance that was sold prior to the 1980's

The premiums generally remain constant over the life of the policy and must be paid periodically (i.e. monthly, semi-annually etc.) in the amount indicated in the policy

The premium you pay is used for two purposes:

To pay the annual insurance cost

As you get older, the cost to insure you that year gets higher because of the increased risk of you dying.  In a whole life insurance policy, the cost of the insurance is averaged out over the expected life of the policy so that your insurance charge is a constant and flat rate. 

For example: If you buy your whole life insurance at age 30 the actual cost for the company to insure you in that year might be $1.00 /thousand dollars of insurance.  However, when you're 65 the cost to insure you would be much higher, maybe $15/thousand.  The policy therefore uses an average of the costs starting with your age 30 cost and going right through to your projected age at death i.e. age 84.  Thus the average cost per year over the life of the policy would be i.e. $7.50/thousand and this would then be the annual charge to your policy.  In the early years you are over-paying for the cost of the insurance but are substantially under-paying in the latter years.

To build a cash value inside your policy

From the above example, if the policy stipulated that you pay $7.50 per thousand only $1.00 is used to pay the insurance cost in the first year.  The difference in cost of $6.50 is used by the insurance company for expenses, paying out claims and to invest.  The profit that they generate from the use of your money is paid back into your policy in the form of dividends.

 In the case of Whole Life Insurance, the cash value is usually affected by your insurance company's financial results or experience.  The Cash Value in your insurance policy is accumulated through the issuance of dividends from your Insurance Company.   The dividends issued are influenced by mortality rates, expenses, and the investment earnings of your insurance company.

This can be both an advantage to you, if your company performs well or a detriment if your company performs poorly.  In either case, over time your policy should accumulate a substantial amount of money and your investment is now solely in one company so that you loose the advantage of diversification.

Universal Life Insurance.

Universal life allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, the insurance company usually requires you to furnish satisfactory evidence of your continued good health.)

The most significant difference between Universal Life and Whole Life is the accumulation and investment of your Cash Values and the way in which insurance premiums are charged.

Universal Life usually only pays the actual annual insurance cost (there is no averaging as with whole life) so that a substantially larger amount of your early premiums go into your investment fund.  The Investment fund is invested totally separate from the insurance company and you can choose from investments all over the world giving you a much higher level of diversification and potential for much higher returns.

Universal life provides death benefits and cash values that vary with the performance of a portfolio of investments. You can allocate your premiums among a variety of investments offering different degrees of risk and reward: stocks, bonds, combinations of both, or accounts that guarantee interest and principal. You will receive a prospectus in conjunction with the sale of this product.

The cash value of a variable life policy is not guaranteed and the policyholder bears that risk. However, by choosing among the available fund options, you can allocate assets to meet your objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. If the specified investments perform poorly, cash values and death benefits will drop

Each policy is constructed specifically to your goals and affordability and there  are a lot of variables and options.  Once all the factors are included, normally, the premium is calculated and an amount set that is level for life.

Because of the complications of the inter-actions of the various input factors, you must work with an experienced Life Agent.  The reward is that you will have a very customized financial cornerstone that makes the most of your money for you.

The following points can help you determine if permanent insurance best suits your needs.

Term to 100 Insurance

This product is based on an average of the costs of buying annual term insurance from issuance of the policy through to age 100.  The premium is therefore level for the duration of the policy, however, in some policies you only pay the premium to age 65, although most require you to pay the premium for life. Policies normally do not accumulate any cash values, but some do include this feature, however the rates increase accordingly.

The face amount of the insurance is paid out at death and many policies will pay out the face amount at age 100, should you live that long.

This is a very simple product and thus is one of the more affordable types of "Permanent Insurance" available.

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