Life insurance is a contractual agreement outlining an exchange – you pay insurance premiums and an insurance company guarantees a tax-free pay-out upon your death. You choose to designate the beneficiary of this pay-out and the amount of life insurance coverage you want to carry. Two factors determine the price of life insurance premiums: your health and your age. Insurance companies do a thorough assessment of your health including family history to determine your price eligibility. There are two main different types of life insurance: term and permanent insurance.
Term insurance covers you for a set amount of time, for example ten or twenty years. With some insurance companies the term then ends, and you will need to redo your medical assessment to purchase a new term. Other insurance companies offer automatic renewable term insurance. In this case, your term will automatically renew at a higher price unless you cancel the contract. The benefit of this renewal is that you avoid undergoing a new medical assessment. For example, if you were diagnosed with cancer during your term, yet had a renewable contract, you would retain the ability to continue to have term insurance. Whereas if you had a policy without this feature and were diagnosed with cancer during your term you would be ineligible for any further insurance. In addition, most renewable term insurance products also have the option to convert your term to a permanent insurance policy. For these reasons I only sell term product that is both renewable and can be converted to permanent insurance. I am here to make a difference selling insurance therefore I am committed to selling products that are only in the best interests of my clients.
Holding some term insurance often makes the most sense when you have a young family or a mortgage and are unable to afford the initial higher monthly permanent insurance premiums. In this phase of life you typically have a higher amount of temporary risk. For example, if you were to lose a spouse when you have young children, are potentially dependent on a double income, and have recently purchased a home, your risk is a lot greater than someone who has fully grown children, can work full-time, and has paid down much of their mortgage. In this scenario you need a higher amount of life insurance coverage for a particular phase of life and this is most cost-effectively achieved with term insurance.
Whereas term life insurance is owned by you, mortgage insurance is owned by a bank. If you die and own term insurance, the payout goes directly to your beneficiary and they choose how to use it. In contrast, if you have mortgage insurance, the remaining balance owing on your mortgage will be paid to the bank and not your beneficiary. This is a decreasing benefit as the more you pay-off your mortgage, the less the value of your mortgage insurance. Another important factor is mortgage insurance is not a guarantee given the process for medical assessment (underwriting) takes place after a claim is made.
Any insurance where the medical assessment (underwriting) is done before a policy is given means that the policy is guaranteed and non-cancelable by the insurance company. If you are considering mortgage versus term life insurance, term may be to your advantage from a guarantee and price perspective.
Permanent life insurance is a contract that lasts for the entirety of your life. With a term contract you pay monthly or annual premiums for the entire length of the term. In contrast, permanent insurance is a lot more flexible. You can choose a length of time over which you pay premiums, but the benefits of the insurance last a lifetime. With term insurance, all the premiums you pay remain with the insurance company. You only receive a benefit if you die within that term. In contrast, with permanent life insurance, all the premiums you pay will go to your beneficiary no matter when you die. None of your contributions are ever lost (unless a policy is cancelled prematurely). In fact, your beneficiary is guaranteed to gain significantly more in return than you contributed through your premiums.
Permanent insurance offers flexible options regarding length of payment term and investment components. This type of insurance is guaranteed and tax-sheltered. You can use the equity in your permanent insurance in many ways. For example, you can choose to spend the money that you have accrued. You can save this money and have a larger tax-free payout to your beneficiary, or you can choose to use your equity creatively. Creative use of your equity includes borrowing against your policy tax-free while your money stays invested tax-sheltered and growing.
Permanent insurance is a lot more costly initially than term insurance because the insurance companies must pay-out permanent insurance 100% of the time unlike term insurance which statistically gets paid out about 3% of the time. If we take a short-term view (10-20 year outlook), permanent insurance seems a lot more costly as the monthly premiums are much higher than term insurance premiums. However, once you renew your term insurance, the premiums go up significantly and skyrocket with every renewal thereafter. As you age, many people are priced out of affording their term insurance premiums. In addition, insurance companies do not offer term insurance policies after the age of 85. If instead we take a longer-term view (20-50 year outlook), the greater premiums paid for permanent insurance initially, when added up cumulatively over time, amount to far less than renewed term policies. In addition, most people who buy permanent insurance in their mid-life finish paying premiums by their retirement. People who choose to buy permanent insurance, while making a greater investment initially, gain phenomenal long-term benefits. Permanent life insurance is your best option if you have a desire to leave money to your family, your spouse, your children or a charity you support. Permanent insurance allows you to do this in the most tax efficient way by making the most of every dollar.
For some this may be the case. You don’t need insurance to be able to leave your family money. However, insurance helps you strategically and tax effectively transfer the greatest amount of your wealth to your beneficiaries. You have worked hard to accumulate a financial legacy for your loved ones, permanent insurance is an important tool for you to ensure that the entirety of that money plus growth gets to your family without being eroded by tax.
Permanent insurance is also extremely useful if part of your legacy includes real estate investments, perhaps a cabin, lake property or second home. When these real estate properties are transferred, they are also taxed. Your loved ones will be left with the responsibility of paying these taxes either on their own or from your remaining estate. A tax-free permanent insurance payout is the smartest strategy to provide the funds required. Permanent insurance also grows in value, therefore taking care of any inflation that would add to a higher tax bill on increased real estate values.
Finally, dealing with wills and settling an estate can also take up to 6 months, a year, or in contested cases even longer. Permanent life insurance allows your loved ones to receive the transfer of inheritance quickly (within 10 business days), perhaps relieving financial strain during a time of grieving and arrangements for coming together as a family and community.