Life Insurance: The Basics
Life Insurance seems to be one of those topics that many people do not like to talk about. After all, who wants to think about their own mortality? Life insurance, disability, critical illness, long-term care, investments, and wills all play an important role in financial planning. Although there is no requirement to have them, most individuals still have a significant need for financial planning and specifically for life insurance.
Similar to with automobile and property insurance, there are many different companies that offer life insurance and other financial products. They can be purchased through a Broker (such as ourselves), an Agent or sometimes directly through the Insurance Company. There are also many different types of life insurance policies available and it can be difficult to know which one is the right fit for you.
We thought it might be helpful to do a brief overview of some of the more common types of life insurance policies available in today’s market.
Provides coverage for a limited period of time, such as 10, 20 or 30 years. The payments are fixed for the term, and when the original period expires, the client has the option of discontinuing the coverage or renewing at a revised payment amount (which is normally based on a persons age at the time of renewal). In the event the insured becomes deceased during the term, the death benefit (which is the amount of coverage the policy is for) will be paid to the beneficiary named on the policy. Term insurance is the least expensive type of insurance and is often used by individuals for a specific purpose, such as covering debts (i.e. mortgage) or for final expenses in the event of death.
A form of permanent insurance, it provides coverage for the insured’s whole life and in most cases requires premiums to be paid every year into the policy. There are two types of whole life policies: non-participating and participating.
With non-participating policies, the death benefit, cash surrender value, and premiums are determined at the time the policy is issued. The Insurance Company assumes all of the risk, meaning if future claims are underestimated they make up the difference and if future claims are overestimated they retain the difference.
With participating polices, the insurance company shares any excess profit with the policyholder. These dividends or refunds are generally not taxable as they are considered to be an overpayment of premium.
Another form of permanent insurance, the excess of premium payments over the cost of insurance is credited to the cash value of the policy. Each month, the cash value is credited with interest and the policy is debited by a cost of insurance charge as well as any other policy fees or charges. The advantage of the universal life policy is its premium flexibility (they can vary from a specified minimum amount to the maximum amount allowed by the contract), and the adjustable death benefits which can be increased or decreased.
If you have any questions regarding life insurance or any other financial products, please do not hesitate to contact our Financial Advisor, Lloyd Keating, and he would be more than happy to assist you!
The Costen & Associates Team