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Old 07-22-2015, 10:15 PM   #1
Slava
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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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Old 07-29-2015, 07:37 PM   #2
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Do many term life policies include physicals to determine rates?
If so, how much of a swing would you see for a healthy person, average and unhealthy person?
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Old 07-29-2015, 07:39 PM   #3
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You may prefer not to answer this one, but is the best rate for a term policy typically through your current insurance broker (house and auto) or is it worth shopping around?
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Old 07-29-2015, 09:14 PM   #4
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Quote:
Originally Posted by GP_Matt View Post
Do many term life policies include physicals to determine rates?
If so, how much of a swing would you see for a healthy person, average and unhealthy person?
The rates can actually vary quite a lot. Usually what I do is quote the average premiums for people, where they are of "average" health. Your personal situation can mean that you pay less than those averages (if you are healthier than average) or you can pay more (if you have some risk factors that in the eyes of the insurer increase the risk of death as compared to other people in your class.

It gets a little more complex than that because you can have an offer from an insurer for rates higher than you like, and we can apply elsewhere an attempt to get a better offer.

Lastly, about physicals, some applications do not require physicals. So for example some can be completed purely over the phone these days, and some can be completed only by a questionnaire which requires no physical, although they may want one after those answers. There are also some policies that have no physical required due to the amount of coverage being smaller.

I should add that I'm talking purely about policies that are standalone policies. They are not going to require underwriting at the time of claim, or providing the coverage only after a time period has elapsed or other stipulations. There are some policies that are guaranteed to be issued (with very few qualifications).


Quote:
Originally Posted by GP_Matt View Post
You may prefer not to answer this one, but is the best rate for a term policy typically through your current insurance broker (house and auto) or is it worth shopping around?
I think its worth shopping around to some extent because if you're talking about a "plain-jane" kind of life insurance policy (without investments attached, and no dividends or things like that) there aren't a lot of differences in the policies themselves. To put this somewhat brutally, the contracts are pretty simple; someone dies and someone gets paid. The death is easy to prove in the vast majority of cases, and the main stipulations are all standardized across companies. So its worth shopping around and seeing what the different companies offer for the same policy. Sometimes the differences are quite pronounced.

Of course I happen to know a guy who could give you some quotes if you like!
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Old 08-17-2015, 02:32 PM   #5
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My wife and I are expecting our first child in November, so we started thinking about purchasing some life insurance, should something happen to either one of us.

Do you recommend any reading material that we can do some research on our own? We're not sure what type of contract, the amount we should be purchasing, or even a rough estimate of the cost of premiums would be, so any information would be extremely helpful.

Thanks in advance!
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Old 08-17-2015, 05:09 PM   #6
Slava
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I can email you a worksheet kind of thing if you like, which would help you to figure out what amount would work? As far as different types of insurance and things like that I could chat with you on the phone or we could have a coffee and I can explain it. I don't know of anything that is all that thorough in explain things, unfortunately. I basically use my initial post here in explaining things to people, so by all means if that leaves more questions than answers I would live to know!
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Old 08-19-2015, 10:08 AM   #7
fundmark19
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Question!

My parents recently decided to look at some life insurance policies they had taken out on the kids. They were small policies ranging from 10-30k depending on the child and now that everyone is old enough to cover their own funeral expenses is the best way to cash them out? They have a combined surrender value of about 25k so it would be a nice chunk of change for my parents. 3 of the policies are life 65 policies so does it really make sense for them to keep paying for 25 years on these policies now
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Old 08-20-2015, 06:14 AM   #8
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Well I obviously can't tell you on a public forum that you should cancel coverage, because of potential liability issues and things like that. Theoretically though, there are a couple options here that people generally consider:

1) Cancel the policy and collect the cash surrender amount. This is likely taxable, so that is one factor to think of as well.

2) Transfer the ownership of the contract from the parents to the children. This would mean that the children can now designate beneficiaries as well. The big advantage with this is that the children then have a tax sheltered investment going forward as well; it grows without taxes payable. Of course the insurance is a benefit, but oftentimes the values are not very large. The other factor here is that the children now get that cash surrender value when/if they surrender that policy, and that might not be what the parents want to do.

Depending on what the policy is, how much is in there and factors like that, you might also have the option to stop paying the premiums all together, transfer ownership to the children and have it continue building. This would be because the underlying investments are receiving more per year than the premiums. It's hard to guess whether you're in this position, and really what you need is an illustration from the company that holds the policy to see what makes sense.

Of course let me know if you have any questions!
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