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Life Insurance


Term Life Insurance 

Term life insurance provides protection for a limited period of time and pays benefits only if the policyholder dies during the specified time. The major benefit is the reduced cost compared to permanent insurance. Term policies often act as a supplement to permanent insurance, providing a large amount of coverage for the lowest possible cost. While term policies are in force, the policyholder is offered the right to convert to a permanent

policy without evidence of insurability. (Evidence of insurability is the statement of information required by insurance companies that proves the policyholder is an insurable risk.)

Term policies are available on a renewable or level term basis. Renewable policies can be issued on a 1, 5, 10, 15, 20 or 30 year renewable basis. These policies can be renewed at guaranteed increasing rates related to the current age at renewal, but as specified in the original policy document. Typically they may continue until age 80, and are convertible up to age 70. Level term plans are offered in terms, to age 65, 70, 75 and age 100.

In the short term, term insurance plans are very low cost but over the longer term the premiums a can escalate significantly. Historically and statistically only a small percentage of term policies are in force when policy owners die. It is for this reason that the policies are marketed for such low premiums.

It is usually possible to add a variety of additional riders, such as accidental death, disability premium waiver, and even critical illness insurance coverage to these plans depending on the company. Term assurance is available either as a stand-alone product or supplementary to permanent life assurance policies like Universal Life or Whole life as described below.

Permanent Insurance 

Permanent insurance implies protection for life. It comes in participating (with profits) and non-participating, and can be whole life, limited pay life, endowment or Universal Life. Whole Life, often called Ordinary life or PAR is the original permanent life insurance contract. These plans have level premiums over the life of the contract and on death pay the sum insured to the beneficiary. Premiums are higher than term assurance and this difference in mortality costs builds cash values used to fund higher mortality costs at older ages. Cash values can be guaranteed and increase over the life of the contract.

PAR policies owners share in the risk and profits of the company’s participating policy funds. These funds are conservatively invested in bonds, mortgages, property and stocks to provide steady returns. PAR policyholders share in profits through dividends, which reflect investment experience after allowing for expenses, mortality and profits. Declared dividends are guaranteed and can be used to return or reduce premiums, or increase the sum insured and cash values.

PAR products have a “bundled” design, where the premiums’ breakdown into mortality costs, expenses, investments and profit share is not disclosed. The policyholder’s statement shows their premium, cash value, current insurance coverage and the publicly stated dividend rate.

PAR policies are suitable for policyholders who are: more risk averse; want balanced, stable steady returns; want the insurance company to control their investments; have stable cash flow to fund premiums; and are satisfied with less flexibility.

Universal Life (UL) is the second type of permanent insurance. It has become very popular as it allows the policyholder considerable flexibility in the amount and timing of premium payments. The “unbundled” product design discloses the various pricing elements such as interest earnings formulas, mortality costs, and company expenses.

To understand UL, it is useful to think of it as a bucket of money into which you pour your premium dollars. The bucket has a tap at the bottom, which the company opens to take out the expenses for the policy such as the annual premium tax, the monthly cost of insurance and expenses. The money remaining in the bucket earns interest and growth based on how the funds have been invested in the selected investment accounts.

In a UL policy the cost of insurance and expense charges are guaranteed. UL policies offer numerous investment options in fixed income and equity linked indexes, and managed accounts where the policyholder can choose where his funds are invested. Certain fixed income investment accounts offer minimum guarantees.

UL offers more flexibility in life coverage, deposits, and investment choices. It is suitable for those who: want to exercise choice and control of their asset mix; are comfortable with normal investment risk; want to monitor and track their investment performance; want an unbundled policy with guaranteed costs; want ongoing flexibility to change their policy as needed.

A key advantage of PAR or UL is that, under section 148(3) of the federal Income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation. On death proceeds pass tax-free to one’s beneficiaries. However it is also possible to deposit amounts in excess of the normal mortality and expense costs and invest these extra amounts in the contract on a tax-deferred basis and provide future favorable income options.