These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
Insurance should form the foundation of any financial plan. This week I’ll be covering different types of life and health insurance. Life insurance is one of the most common forms of insurance. Life insurance will payout a lump sum of cash tax free in the event of death. There are two primary types of life insurance – Term Life and Permanent Life Insurance. Both will payout tax free cash benefits in the event of death. The primary differences are how the premium costs are structured. Today I will focus on Term Life insurance.
Life Insurance proceeds are paid out to beneficiaries designated within the policy tax free in the event of death. Beneficiaries are typically spouses or children, however, you can designate anyone you wish. In most cases, beneficiaries are easily changed or added in the event of additional children or changing family and marital statuses.
Term Life insurance premium costs are generally less expensive in the short term than permanent life insurance. The premium costs are fixed for the term of the insurance policy, ie 10 years, 20 yrs, 30 yrs. In most cases, the renewal rates at expiry are guaranteed. Renewal rates will be more expensive as the insured will be older. Unlike mortgages, where changes are generally subject to penalties, insurance policies can be changed at any time without penalty costs. At expiry, policy owners are not obligated to assume the renewal rates. In most cases, people will re-apply and often adjust the amount of coverage to suit their current lifestyle and family situation. Assuming there has not been a material change in the insured health, re-apply is generally less expensive than the guaranteed renewal rates.
Most Term Life Insurance policies will expire around age 80 (could be ealier or later so best to check your policy). Term life insurance is generally protection against pre-mature death or for shorter term needs such as debt obligations (loans and mortgages), or protecting against income loss for families with young children. While we all assume we’ll live to normal life expectancy (83), the reality is 25% of Canadians will pass away before the age of 65 (through sickness or accident)
Unlike permanent Life insurance, term life insurance does not accumulate cash values. There will be an underwriting or approval process to qualify. These may or may not require medical tests (covered by the insurer). Depending on the insureds health, one may qualify for preferred (cheaper) rates (if you have a better health standard/lifestyle) or for those with health issues, rates may be higher than healthy individuals.
Term Life insurance offers affordability and flexibility. Term Life has a lot of flexibility, and should be reviewed regularly as family and work situations change to ensure amounts of coverage, beneficiaries and type of coverage maintain pace with lifestyle. Check with a licensed insurance advisor for your options that best suit your needs.
Share these ideas with friends and family and come back to check out daily financial tips and ideas. If there are subjects you wish covered or questions, please email me and I’ll include them in future posts.