A life insurance policy is a contract with an insurance company. As long as the policy owner
(consumer) pays the premiums the insurer is legally bound to pay the benefits provided. The
policyowner however, can terminate the contract at any time by informing the insurer or by
discontinuing the premium payments. Premiums are determined by age, sex, health condition
and the plan selected.
Consumers have a number of options when purchasing a policy:
Term insurance is, by definition, a temporary insurance. Each month or year, a premium is
paid to cover the risk (insurance amount) during that period. Benefits are payable to the
beneficiary at the death of the insured.
Term plans have premiums that are designed to remain level for a period of 1,5,10,15,20 years,
or even to age 100. Most term plans terminate at a certain age (e.g.: 75,80). Care should be
taken when purchasing a Term insurance plan that the consumer has the ability to convert or
renew the coverage.
Conversion allows for the policy owner to change to a permanent product without medical evidence.
Renewal allows the continuation of the coverage once your selected term has expired without medical
evidence. Both features once exercised usually increase the premium the policyowner must pay.
These are important features as they ensure the continuation of the insurance should the health of
the insured deteriorate. They also allow for the management of costs as rates escalate with advanced
ages. Term insurance is effective for risk, which exist for a certain time frame, or used as a bridge
to address a permanent risk until a permanent solution is affordable.
Universal Life policies include insurance and savings in a single tax-advantaged plan. These two
components allow for flexibility within the policy.
With Universal Life you have the ability to change your coverage, deposits and investment choices in
response to your changing needs, conditions, or circumstances. Deposits are applied to the policy as
they are paid each month or year. The insurance company deducts insurance cost (mortality costs) from
the deposits, as well as, for any riders and/or supplemental benefits. The excess deposit is then applied
to the saving account, which is made up of an investment mix of your choice.
As a general rule, Universal policies provide for two ways to structure your insurance costs:
Universal Life policies offer a selection of investment options within the policy. As a result, and by
design, these policies can develop significant cash values, which can be accessed by the owner of the policy
through surrender, policy loans or leveraging. The excess deposits / cash value accumulates in the policy loan
on a tax-deferred basis.
- Yearly Term - With this structure the cost of insurance increases as you age.
This option may be advantageous if you want to make higher contributions to the savings
account in the initial years. Most universal life policies will allow you to convert from
Yearly term to Level term.
- Level Term - The cost of insurance is set for the life of the policy.
This will most likely be attractive in later years.
Who will benefit from Universal Policies?
Individuals who have maximized their annual R.R.S.P contributions and who are
seeking additional tax-sheltered cash accumulations.
Business owners seeking to maintain value of their business, and provide a pension
Parents or grandparents who want to give their children or grandchildren a head
start on education funding, a first home, or a business start-up fund, to name a few.
Enables insurers to offer coverage for the "whole of life" with payments of level premiums throughout.
During the initial years the premium is more than adequate to cover the risk. The difference is then
invested to form policy reserves, which subsidize what would be an inadequate premium in the later years.
This reserve then creates a cash surrender value for the policyowner. Over the years the reserve can become
considerable and can be accessed by policy loans. This concept is often misunderstood by consumers. Withdrawal
of cash via policy loans allows for the continuation of coverage. If a policy owner wishes instead to just
remove the cash without putting it back, the coverage would terminate or have to be reduced in later years.
"Participating" Whole Life plans also attribute growth to the reserve from the insurer's general performance of
mortality gains/losses associated with life insurance underwriting. These are usually paid to the reserve in the
form of dividends.
Reserves also can be used to provide premium payments, extended term insurance, or even paid-up insurance.
Recent years have proven that conservative estimates of future values should be assumed relating to the above.
If high estimates are assumed and market conditions dictate otherwise, the consumer will be disappointed with
the results. Historically, the growth of the reserves within whole life policies has been very respectable.
In summary, Whole Life contracts are effected by the contractual obligations and performance of a life insurer,
where as, Universal Life values are effected by the consumer's choices and market conditions.
The objective of Disability insurance is to maintain your standard of living in the event you become disabled.
Disability insurance provides a replacement income in periodic payments to the insured while disabled. Ideal
disability coverage provides protection from any sickness or injury. Less comprehensive plans do not provide
sickness coverage, or coverage for symptoms that occur 90 days after injury. Coverage for behavioral disorders
or injury from high risk activities may also be excluded from less comprehensive plans.
The actual definition of disability is very important. A good definition of total disability is ?due to injury
or sickness the insured is not able to perform substantial and material duties of their occupation and is under
the care and attendance of a physician.? Less comprehensive coverage may specify that total disability requires
the insured cannot perform any job.
You need to choose the amount of time you wish to receive benefits should you become disabled. You can purchase
plans that provide benefits for 2 years, 5 years, 10 years or to age 65. An elimination period/waiting time also
needs to be chosen, this is the amount of time that an individual must be disabled before they can receive
benefits/payment. The elimination period is again available in different time intervals. The most common are
30 days, 60 days, 90 days, or 120 days.
The cost of your Disability plan is directly affected by the amount insured, benefit time, and elimination period
chosen. Your occupation will also effect the cost of your plan as occupations are related to risk.
Disability plans also offer features and optional riders such as:
- Non-Cancelable Coverage -
You want to consider whether your plan is non-cancelable; meaning the insurance company cannot discontinue or cancel your plan. It is in your best interest to get a non-cancelable policy.
- Presumptive Disability -
Most contracts also provide for presumptive disability. Meaning through sickness or an accident there is an irrevocable loss of speech, hearing, sight, or loss of use of two limbs. If this occurs, regardless of whether the claimant is working or not, benefits or a percentage of benefits will be paid for the benefit period or life.
- Recurrent Disability -
Any reoccurrence of a disability previously claimed for within a specified period of time, (usually 3, 6 or 12 months) will be considered a continuation of the original disability. The waiting period/elimination period would not be required.
- Rehabilitation Clause -
Many insurers will pay at least a part of rehabilitation costs for a sick or injured individual.
- Residual or Partial Disability -
The definition of this benefit will vary. Residual/Partial disability riders usually state due to injury or sickness, the insured:
The benefit period and the benefit available are varied. Residual or Partial disability is an important consideration for business owners, farmers and management.
- is not able to do one or more of their substantial daily duties.
- not able perform their duties within the time it would normally take.
- has had a loss of income of at least 20%
- is under the care of a physician.
- Cost of Living Adjustor (COLA) -
This option ensures over time your benefits will keep up with the increased cost of living and inflation. Some plans provide indexing that adjust with the Consumer Price Index while others have specific ranges from 2% to 10%. This is an important option if you are considering a plan that pays benefits over a longer period of time.
- Future Income Option -
This guarantees an individual the right to increase their coverage if they have the income to justify the additional insurance, regardless if any changes in your health that may have occurred. Most insurers allow 20% of your option to be exercised annually regardless of any changes in your health.
- Survivorship Benefits -
This is the payment of a lump sum amount paid to a beneficiary should the insured die while they are collecting a disability benefit. (Usually based upon 3 months of benefit)
- Waiver of Premium Benefit -
If a disability continues for more than a specified period of time (usually 90 days) premiums are waived. Meaning you no longer pay for your disability coverage while you are disabled.
Critical Illness is designed to help with the financial and emotional impact should a person suffer a critical
illness. Many lifestyle changes may be required to cope with the effects of the illness. As well, a significant
amount of money might be needed to obtain the best medical care.
Critical Illness provides a tax-free lump sum payment upon a diagnosis of one of the covered critical illnesses.
This lump sum payment can be used to cover the costs of added medical expenses, home renovations, mortgage
payments, childcare, and housekeeping expenses, or any outstanding debt you may have. You may allocate the funds
however you want. Commonly covered illnesses are:
- Heart Attack
- Coronary Artery Disease requiring surgery
- Multiple Sclerosis
- Loss of Speech
- Kidney Failure
- Major Organ Transplant
- Loss of Limbs
The amount insured is determined by the consumer based on needs and premium comfort.
Most Critical Illness policies also offer a return of premium option that reimburses the insured if a claim has not
been paid by a certain age. A premium is charged for this option.
Critical Illness coverage is relatively new to Canada and is fast becoming a very popular product due to the benefits
associated with the coverage.
Underwriting medical requirements will vary based on age and amount of coverage. If you have a past
medical condition the insurance company may request additional information from your Physician. On
occasion policies are rated or have exclusions. A rating means the company feels you are at a higher
than average risk and will increase the cost of your plan to compensate for the additional risk.
Exclusion means they will not cover a specific illness or body part due to a previous history. Medical
history, diagnostic test, financial and general information might be requested depending upon your age,
the amount and type of insurance applied for.