Life Insurance – simplified

 by Perrii Muthuraman

Often, there is confusion about the different types of Life Insurances. Here is a simplified, plain language explanation. Even if you have learnt at least one new aspect, then the purpose of this writing is fulfilled. I am sure, you will not be disappointed. Read on.

Mortgage Life Insurance

Goal:  Paying off the mortgage outstanding in case of death.

Benefits:  Covers mortgage balance in case of death. Suited for smokers – less premium.

Drawbacks:

1. Premium is constant; but covers only decreasing (mortgage) balance
2. You cannot take the insurance along with the mortgage if and when you change the lender
3. Lender is the beneficiary (and not your family). It means that the control lies with the lender and not with your family.
4. Most important: It is a “post claim” insurance. It means that it is not underwritten until a claim is made. There is a possibility for declining the claim on the health issue non declaration.

Cost: Fairly reasonable; comparable to term life insurance.

Recommendation: Buy mortgage insurance, if you are a smoker; otherwise better to go with term insurance to cover your mortgage amount.

Term Life Insurance

Goal: Limited security for limited period; Basic coverage at lower cost; covering the debts/income producing asset(s) till they are liquidated.

Benefits:  Low premium

Drawbacks:

1.         If renewable, subsequent years will be costly. However future renewable premiums can be learnt in advance.

2.         If death happens after the term of insurance (say 10 or 20 years), your loved ones will get nothing from the insurance company. However, taking a term life insurance may still serve a purpose like taking care of children, when they are young ( after wards, they are adults and it is presumed that they will take care of themselves)

Cost: 10 year term is the cheapest of all. Another popular term is 20 years.

Recommendation: “Buy term and invest the rest” is a popular recommendation. This recommendation may not suit to all. If afford ability is a critical issue, then the solution lies in Term Insurance. If you opt for term, make sure that it is renewable and convertible.

Universal/whole Life Insurance

Goal/Benefit:  Lifelong coverage; Option to buy investments; Payout is guaranteed irrespective of the date of death. Tax deferred/sheltered investment growth subject to certain conditions and avoidance of probate fees. It also provides funds for payment of taxes on death, without selling any of the assets.

Drawbacks:

1. Expensive than other types of life insurance.
2. If investment includes segregated funds, you pay higher Management Expense Ratios (MERs)
3. Restricted to a single company investment products.
4. For many, it is difficult to understand.

Cost: Expensive than all other types of life insurance.

Recommendation: First understand what you are looking for in that insurance, as there are different varieties in the market. Then see if any of your goal matches with the goal/benefit of the product. This is not a plain insurance product. Buy it from a person, who is knowledgeable and trustworthy.  If the price (premium) is cheaper than term 100, it is a good buy.

Do I really need universal life insurance?

You really do not need universal life insurance in the following circumstances.

1. Your goal is income replacement. Then this need goes away with time, usually when your kids become adults, and are not dependent on you any longer.
2. You do not want your children/anyone else to inherit more after you.
3. Your main asset is RRSP and/or TFSA. It means that the estate has lot of cash that is enough cash to pay capital gains on your death. There will be no need for any distress sale of any of your assets for distribution among the inheritors, after paying the tax to Revenue Canada.

Which insurance is suited to your circumstances? To discuss, call Perrii @ 416 473 6100.