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Old 07-22-2015, 10:15 PM   #1
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Join Date: Dec 2006
Location: Calgary, Alberta
Default A primer on life insurance

Life Insurance might not be particularly exciting, but for many of us itís a necessary evil. I figured I would write-up a primer for you here to know what's available, how it operates and some basic Q&A that I receive a lot. Feel free to ask away if I missed things here or there are any other questions you have! I should mention that I was one of three consultants across Canada for the new life insurance licensing qualification coming out. I point that out not to impress you, but impress upon you that I do know my stuff in this area!

First, there are two main types of life insurance. Term insurance and permanent insurance. Term insurance generally stays in force until age 80, and the costs increase every ten or twenty years that the policy is in force. There are some other types of term coverage available, with those ten and twenty year options being the most common. Permanent insurance basically is just what you would expect; it stays in force for your lifetime as long as the premiums are covered (a little more on that later).

With term insurance one of the options almost always available is to convert the term policy to a permanent policy. There is also a term-life option available once you hit a certain age, and that policy stays in force for life and the premiums do not increase. The other frequent use of the term policy is for shorter term things such as debts (mortgages are incredibly common) and then once those are taken care of or drastically reduced the policy can either be reduced and converted to permanent coverage or canceled altogether.

Permanent insurance often carries with it an investment or dividends, or both. So if the cost of insurance is say $400/year, the premiums paid might be say $500, and the extra $100 builds up a cash value. These policies accrue dividends and there are a number of options for how those dividends are directed. They may buy more coverage, pay premiums for you so that you can stop paying, or a couple of other choices. Permanent coverage generally is built so that the premiums stay level throughout the lifetime of the policy, but aren't always. The important thing to recognize though is that the insurer is expecting that they will eventually payout here. While term policies are canceled as you age and the price increases, people are more inclined to keep permanent policies where the price doesn't increase. There are two main types of permanent coverage; Universal Life and Whole Life. Universal Life is essentially a policy with an investment account stapled to it. A whole life policy is one where you receive the dividends as I explain above. Either way, these are the kinds of policies you might have heard about where people pay for a certain period of time and then the policy funds itself.

That's a quick review of the major types of contracts available...there are more! Here are some of the more frequent Q&A I tend to receive:

Are you covered for certain things and not for others?
For a standalone insurance policy, which is what I am talking about here it only matters how you die in a few circumstances: suicide if the policy is less than two years old, or an illegal act. If you didn't intentionally misrepresent yourself in the application, and withhold pertinent information, the insurer will review your case and it's very fair. It doesn't matter whether you are ill, have an accident or some other unforeseen thing takes place. These policies cover those events.

Can I name my children as beneficiaries?
Yes you can do that, but if they are under 18 when you name them as beneficiaries you will need to name someone as trustee for the funds.

What is a contestability period?
Basically the insurer has two years to contest the application in the event that you have misrepresented yourself. This has to be a material misrepresentation and would include things such as smoking status, sex, or things like that which would materially affect the policy.

I have a couple cigars on the golf course every year...but I'm not really a smoker?
I get this kind of inquiry all the time. Basically if you have a dozen cigars a year you are a non-smoker. If you have one cigarette though, you're a smoker. Sometimes we can argue this and some companies are more flexible than others. Sometimes they look at your whole picture and go through those decisions.

How strict are companies with health issues and medical history when it comes to issuing policies?
This is a gray area really. I argue all kinds of cases and issues with the insurers to varying degrees of success. Sometimes they're unrelenting, and will issue a policy but only where the premiums are higher. Sometimes we can get coverage at the standard rates with a bit of arguing our case and trying to reason with them. I have had cases where we get a poor offer from one company and plead our case to another to receive a standard offer; there are a lot of factors here and I'm willing to go to bat for my clients!

Hopefully this gives you some information about life insurance and how it works. If you have questions, feel free to ask them here (it would be great to have a little discussion in this sub-forum!) As always though, feel free to PM me or contact me directly if you like.
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