Life Insurance Questions and Answers: FAQs for Canadians
Life Insurance Questions and Answers: FAQs for Canadians
1) How much life insurance should I have?
2) How much will life insurance cost?
3) What is the difference between term life & whole life?
4) What is term insurance?
5) What is whole life insurance?
6) What is universal life?
7) Why should I buy life insurance?
8) How do life agents get paid?
9) Is live insurance tax free?
10) Doesn't my mortgage insurance cover me?
11) Isn't my life insurance through work enough?
12) Should I buy life insurance online?
13) How do I know my policy will pay out?
14) Can you borrow money on a term policy?
15) How long do I have to quit smoking before my rates go down?
16) What can I do if I was declined for insurance before?
Detailed responses to these life insurance questions and answers follow.
Life Insurance Questions and Answers: Detailed Answers
Life Insurance Questions and Answers: 1) How much life insurance should I have?
In most cases, the perfect amount of life insurance is just enough. Having too much life insurance is simply an additional cost without an additional benefit.
Having too little insurance means that the beneficiaries may be left wanting in the event of the death of the annuitant. A good rule of thumb is to calculate the following:
- How much do I have?
- How much do I owe?
- For whom am I responsible?
- For how long?
- And what will change in the next five years?
These life insurance questions and answers represent a needs analysis calculation.
For most families life insurance should cover the debts that they currently have and in some cases some or all of the income in the case of a wage earners death. Subtracted from this calculation might be the assets they currently hold.
For instance the equity in their home, their RRSP's, their savings, or other assets that could be used to help support the family in the case of an untimely death.
In the case of some corporate strategies the insurance should be enough to cover the value of the portion of the company should one of the partners or shareholders dies. The insurance could then pay off the estate of the deceased and allow the company to continue to function normally without the issues of probate to get in the way.
In some cases insurance might be used to pay off tax bills that occur to an estate or to a company upon the death of the annuitant. In this case it is a matter of calculating the amount of tax owed and purchasing insurance to cover this tax liability.
In any case, there must always be an insurable interest that is to be covered. Life insurance cannot be purchased for its own sake; there must always be a reason and justification before qualification.
Life Insurance Questions and Answers: 2) How much will life insurance cost?
The cost of life insurance depends on a number of factors. For individuals those factors would include age, smoking status, sex, and medical health.
The monthly or annual cost of insurance will also depend on the type of insurance that is purchased. As an example term insurance is the least costly of the three types of insurance.
Whole life insurance is more expensive since the insurance costs are being paid up front and the policy is accumulating cash value. A whole life policy that is paid up in 10 years would be much more expensive than a policy that was paid over its lifetime to age 100.
Universal life policies also have higher minimum payments but the nature of these policies is such that a higher premium may become necessary in order to make sure that the policy will survive.
When considering life insurance questions and answers, it is important to analyze your cash flow to make sure that you are able to afford the monthly or annual payments. There is no sense in purchasing a product that you can't afford and that you may cancel at some future time because the cost is too great.
Because life insurance requires prequalification we want to make sure that we can maintain the policy and not have it lapse and have to re-qualify later when perhaps our medical health is not as good.
Your life insurance advisor should always do a needs analysis to make sure that your family is properly covered and that your cash flow will allow you to maintain the policy. If your advisor does not do this type of needs analysis then you need to find a new adviser.
Life Insurance Questions and Answers: 3) What is the difference between term life & whole life?
The difference between term life insurance and a whole life insurance is something like renting versus owning a home. Term insurance means that you will have the coverage for a set period of time at a set premium. Should you fail to pay this premium then you will lose the coverage and the benefits.
Most companies allow 31 days of missed premium before they will cancel the policy. They will also allow reinstatement within the next two years if all of the premiums are repaid and there is no change in health or medical status. Term insurance is akin to renting a death benefit.
Whole life insurance on the other hand is meant to last for your entire life. In this case you pay more for the insurance upfront than is required to cover the cost of insurance. The additional money is deposited into a cash value account much like a savings account and a small amount of interest is paid on this additional cash.
Over time the cash value increases and the obligation of the insurance company for the face value of the insurance becomes less.
Some whole life policies allow you to pay them up in 10 years 20 years or until age 65. At that point no more payments are required. Also the cash value that is built up and policies such as these can be used as collateral for a loan at some time in the future.
Any growth inside of the policy grows tax-deferred. Whole life policies are an interesting product with regard to lifelong financial planning and also for estate planning purposes. Whole life insurance is like owning the death benefit.
Life Insurance Questions and Answers: 4) What is term insurance?
Term insurance is the simplest and least expensive form of life insurance. Term insurance provides coverage for a set period of time at a set premium. When that time is up the policy may be renewed but at a much higher rate based on the current page of the annuitant.
Typical term policies are ten-year, 20 year, or 30 year terms. Some companies also provide term policies to age 100. Should the owner fail to pay the premium on the term policy then after 31 days the insurance company will cancel the policy and the annuitant will have to reapply.
Most term policies can be reinstated within two years of failure to pay but the life insurer will have to pay back all of the premiums owed and re-qualify medically. Most insurance companies in Canada allow term policies to be converted into permanent policies either a whole life policy or universal life policy.
So for many families term policies are a good way to start out providing protection and when cash flow allows gives them the option to convert to a more permanent product.
Life Insurance Questions and Answers: 5) What is whole life insurance?
Whole life insurance is insurance that is meant to be permanent and last for the annuitant’s entire life. The owner of the policy will pay more money than is required in the beginning in order that they will have the insurance at the end.
The additional money that is paid at the beginning goes into a cash account that has guaranteed values inside of the insurance contract. The face value of the insurance and the premium are also guaranteed.
Over time the cash account will grow the insurance company will pay a small amount of interest much like a savings account. As the cash account grows insurance companies obligation to pay out the face value becomes less. The beneficiary will receive either the face value or the cash value whichever is greater upon the death of the annuitant.
Most whole life policies have a provision where if the premiums are missed for some reason then the cash value will be loaned to the contract to pay for the premiums thus making sure that policy is not canceled due to nonpayment.
Whole life policies usually come in two forms, either participating policies or nonparticipating policies.
Nonparticipating policies accumulate only the cash value that is paid by the premiums and the small amount of interest that is paid by the insurance company.
Participating policies, on the other hand, share in additional monies the insurance company has available at the end of every year after deducting all of their expenses and costs. This additional monies paid to park dissipating policyholders in the form of a dividend. The policyholders can take the dividend as cash, as an addition to their cash value account, use it to reduce their premiums or to purchase more insurance often called paid-up additions.
Many policyholders like paid-up additions since the additional insurance will also give them additional dividends every year that the new insurance is purchased. Although the face value, the premiums and the cash value account is guaranteed inside a whole life insurance contract, the dividends are not guaranteed.
However, most insurance companies have paid dividends on participating policies faithfully for many decades. In this way, participating policies often build up quite large amounts of cash value over time. Another guaranteed benefit of whole life policies is loan provisions. Policyholders can take out loans against the cash value in their insurance policies usually at competitive interest rates.
This gives them access to the cash inside the policy tax free. Of course should the annuitant die the policy loans must be paid back before the beneficiaries receive the balance of the face value.
Whole life policies are very valuable for clients that want to have insurance coverage for their entire life. They are also useful for estate planning purposes.
Life Insurance Questions and Answers: 6) What is universal life?
Universal life insurance is like a death benefit with a cash value account only unlike whole life insurance the death benefit and the cash value account are unbundled and not combined the way they are in a whole life policy.
Also the premiums are not guaranteed but instead must be paid within a minimum/maximum range. Universal life insurance can be likened to a big bucket into which premiums are paid. The size of the bucket is determined by the size of the death benefit. The bigger the death benefit the bigger the bucket and the more money can be poured into the bucket.
Out of the bottom of the bucket comes the cost of insurance and other administrative fees the insurance company charges. If more money is poured in the top then goes out the bottom than the additional money can be invested in a variety of different linked options.
The linked options are investments much like mutual funds that can go up or down in value. The idea is to invest in linked options that go up in value thus out pacing the cost of insurance. Universal life policies can be set up with a level premium, which of course is more expensive at the beginning so less money goes towards investments or as a yearly renewable term which is much less expensive in the beginning, thus allowing more money to go into investments.
It is important to understand that unlike whole life insurance, the face value, the premiums and cash value are not guaranteed inside this contract. And because it is the policyholder who chooses the investments this product is usually more appropriate for a sophisticated investor or for corporate strategies.
However, like whole life policies the accumulated cash value can be used as collateral for third-party loan or for a loan by the insurance company.
Life Insurance Questions and Answers: 7) Why should I buy life insurance?
Individuals should buy life insurance if they are trying to mitigate the risk of death and the consequences that would occur in the case of a loss of that individual's income or support to their spouse or family. Life insurance is meant to protect families from financial calamity in the case of an untimely demise.
Insurance benefits can be used to pay off debt, including credit card balances, mortgages, vehicle loans, or unsecured lines of credit. The benefits could also be used to provide an ongoing income that can support the family and allow the survivors to regroup without financial suffering.
In addition, life insurance is often used as a way to facilitate estate planning and estate transfer of wealth. Because insurance is paid to beneficiaries tax-free and outside of probate, it is a most private way to transfer wealth and to minimize tax consequences and in many cases creditor proof wealth.
Life Insurance Questions and Answers: 8) How do life agents get paid?
Many clients have life insurance questions and answers about their broker's income.
Life insurance companies pay commissions on policies that are sold to individuals or companies. The commissions are paid either to insurance agencies or directly to insurance agents that may be contracted with that insurance company.
Individuals or corporations never pay advisors directly. They are always paid either by the life insurance company or by their agency.
Agents will be paid a substantial commission in the first year and then they will be paid an ongoing renewal fee to continue to service the client.
It should be noted however, that commissions are clawed back by insurance companies should the client cancel their policy within the first two years. This helps to ensure that agents provide clients with appropriate products that are priced affordably.
Life Insurance Questions and Answers: 9) Is live insurance tax free?
Life insurance products provide a death benefit to beneficiaries of the policy. The death benefit that is paid from an insurance policy to a beneficiary is tax-free in Canada. It is also paid outside of probate as long as the beneficiary is the named person.
If no beneficiary is named then the policy is paid into the estate of the deceased. But the death benefit itself is still paid with no tax consequence.
However, cash values inside of whole life or universal life policies may be taxed based upon the growth inside of those policies. However, the growth is tax deferred and there is no tax consequence while the cash values are growing.
Life Insurance Questions and Answers: 10) Doesn't my mortgage insurance cover me?
Mortgage insurance or creditor insurance is often sold by lending institutions in order to pay off the loan in the case of the death of the borrower. Mortgage insurance differs considerably impersonal insurance.
Firstly, the policy is owned by the lending institution or the bank. This means that when the death benefit is paid it is paid to the bank not to the individual. It can only be used to pay off the loan or the mortgage.
Secondly, the policy itself is underwritten at the time of death. This means the insurance company will investigate the death before they are required to pay the death that. Also, because mortgage insurance represents a kind of group coverage in many cases it may be more expensive than personal insurance.
Finally, the premium on mortgage insurance does not decrease as the loan or mortgage gets paid off. This means that the client continues to pay the same amount for less and less coverage.
Personal insurance on the other hand is owned by the client and is paid to the beneficiaries named by the client not to the bank or the lender. This means the beneficiaries can choose whether or not pay off the loan or to use the money for other more important purposes such as buying food and paying other living expenses.
Also personal insurance is underwritten prior to issue so once it is issued and the insured is qualified the insurance company is obligated to pay. Also personal insurance is portable unlike creditor insurance and the face value never diminishes as the premiums are paid as with organs insurance.
All in all Tom a most insurance professionals consider mortgage insurance to be inferior insurance compared to personal insurance; however, if clients do not qualify for personal insurance but do qualify for mortgage insurance, it is certainly better than no coverage at all.
Life Insurance Questions and Answers: 11) Isn't my life insurance through work enough?
Life insurance questions and answers about your company policy are very common, and show how little employees really know about their benefits!
Life insurance is provided to employees through group benefit plans are usually relatively inexpensive but also usually inadequate in terms of coverage. It is important to read your group benefits plan to see exactly how much life insurance coverage is provided.
In many cases the life insurance coverage is one or two times annual salary. In other words, if your annual salary was $60,000 and the benefit was two times salary that would mean you would be covered for $120,000 worth of life insurance.
In some cases the life insurance coverage is simply a flat amount such as $10,000 or $25,000 as an example.
Most middle-class families who must cover mortgage debt as well as credit card debt other liabilities and try to replace some of the income of the life insured would find that the life insurance provided in group benefit plans to be insufficient for their needs.
As an example, a family with a $400,000 mortgage plus $25,000 consumer debt and a wage earner that earns hundred thousand dollars year could conceivably be justified in having $750,000 worth of life insurance.
Life Insurance Questions and Answers: 12) Should I buy life insurance online?
In this day and age so many things seem to be able to be are just online. For instance, many companies provide quotations for home and auto insurance online, and it may be possible to even make the purchase without ever visiting the general insurance agency.
In the case of life insurance however, the products themselves are more complex and the needs of the client are more demanding than simply purchasing vehicle insurance. Life insurance is an integral part of financial planning for most families.
Most families should make use of the licensed insurance professional before making a decision to purchase life insurance products.
In the case of complex corporate strategies that involve life insurance products professional advice is a necessity.
Life Insurance Questions and Answers: 13) How do I know my policy will pay out?
A personal life insurance policy is a formal contract. It is a contract between the policy owner and the life insurance company. The life insurance company takes great care prior to issuing the insurance policy to make sure that the insured person qualifies for the product.
Because this underwriting process occurs before the issuing of the product once the contract has been signed by both parties, the insurance company is absolutely obligated to pay out on the policy with a couple of exceptions.
The first exception is in the case of the insured committing suicide within the first two years of the policy.
The other exception is if the insured has lied or made false statements on the policy application.
If there are no exceptions, the life insurance policy must be paid to the beneficiaries within 31 days of presentation of the proof of death, i.e. the issuance of the death certificate of the annuitant. The benefit is paid in person, in private, tax-free, and outside of probate.
Life Insurance Questions and Answers: 14) Can you borrow money on a term policy?
A term policy contains no cash value and because of this cannot be used as collateral for a loan.
Life Insurance Questions and Answers: 15) How long do I have to quit smoking before my rates go down?
This is one of the more unusual life insurance questions and answers!
Most insurance companies require smokers to have quit completely for one year before they will consider adjusting rates to non-smoker levels. In that time, the client must not have used any form of nicotine aid or smoking aid that contains nicotine such as Nicorette gum or the patch.
They must truly be smoke-free for an entire year. The client may then make application for non-smoker status; however, the insurance company will perform the usual tests to make sure that there is no nicotine in the client's bloodstream.
Life Insurance Questions and Answers: 16) What can I do if I was declined for insurance before?
It all depends on the reason that the application was declined. If it was declined due to a medical issue and if the medical issue has been brought under control or has been cured that it is possible to reapply and to get life insurance coverage.
In the case of severe illnesses, such as cancer heart attack or stroke, it may not be possible to get traditional forms of life insurance. Some insurance companies provide guaranteed issue insurance at higher rates to those who have survived these diseases and have been disease-free for a certain period of time – usually two or more years.
If you have reason to believe that because of a medical issue or some other issue, you may be declined traditional life insurance, then some cases it is better to apply for the guaranteed issue insurance because many guaranteed issuers will not issue policies for at least two years to those who have been declined by traditional insurance providers.
In the case where there were special circumstances surrounding being declined, it may be possible to reapply with a different carrier with a detailed explanation of the circumstances that led to the original application being denied. Expect lots of life insurance questions and answers from the new insurer.
It is best to check with an insurance professional prior to making application so that they can speak to the underwriter of the insurance company to see if an application would make sense and be considered by the underwriter.
This can save being declined and may provide the client with time to change their behavior if it is a lifestyle issue, or to seek medical help if it is a medical problem.
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