Wealth Education With Heather

Author: hc abbott

Term Life Insurance 101

Hello, everyone! Welcome to my Personal Insurance Information Series.  This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.

Heather

What Is Term Life Insurance?

Term Life Insurance got its name because of its intended purpose; it is designed to be a low cost, short-term life insurance solution.

Term Life Insurance is a guaranteed policy that pays out upon your death. You must be in good health and under the age of 70 to qualify.

Young healthy successful people don’t die very often. However, in the rare event that someone from this demographic does die they need very high amounts of life insurance to cover their obligations.

People in this phase of life have many dependents whose needs must be provided for after their death. This can include a spouse, children, and aging relatives. Car loans and mortgages also need to be settled to create clean titles for inheritance.

Term life insurance is designed for the large payouts that are necessary to settle the estate of a young, healthy person with dependents and debt. Since the insurance company doesn’t have to pay out very often, they can charge low premiums for high coverage.

“Term” also refers to the period of time that the rate is guaranteed for on these policies before going up.  For a term 10 policy, the rate increases every 10 years.

There are also term 5, 15, 20, 100 and variable term policies available, depending on the insurance company offering the policy. 

It is very important to look at the average payment for the length of time you want the policy to last, not just at the initial payment.  

Typically, term insurance ends by age 85, but you will likely want to cancel it long before then due to cost versus benefit. 

Do You Need Term Life Insurance?

When your insurance representative conducts your needs analysis, they will ask questions about your family and debt. If you have a family and you are the main income earner, there is a higher need for term life insurance than if you are a young bachelor. Debt also plays a role in determining the need for term insurance.

Family Obligations

If you would be leaving a family behind you would want to provide enough money to provide a source of income for a period of time.  The death of a loved one can be devastating for the survivors and time off from work and counseling may be needed. Also, if children are young, there can be the desire to leave enough money to help provide for their upbringing and education.

Heavy Debt Load

A heavy debt load is not the inheritance you want to leave to your loved ones. Creditor insurance is not something you can rely on, and only takes care of one specific debt.  In Canada, a good term policy can have a beneficiary named in the policy and bypass the estate entirely. The payout from a life insurance policy in Canada is not taxable to the beneficiary. Tax implications for this can vary by country, so be sure to check with your advisor for the rules in your country.

Young Adults

Some young adults just entering their 20’s will get a term policy as it is fairly inexpensive, to preserve their insurability for permanent insurance. Sometimes people do not feel financially ready to pay for a permanent policy when they have just begun a job. The younger you are when you get a permanent insurance policy, the less it will cost.

Converting Your Term Insurance Policy

Most good term insurance policies are also convertible, which allows them to be changed to a permanent policy. The ideal way to get a permanent policy is to apply for it directly since that will be cheaper, but, if you have become uninsurable, the ability to change the term policy to a permanent one is a good option. 

Term Life Insurance Buying Tips

In summary, term insurance is a low cost, high payout option that has an important place in your insurance portfolio, BUT you may want to reapply a few times to keep costs low.  You will also not likely want to keep it until old age. A permanent insurance solution is always important to have as well.

If possible, choose to get the longer term (term 20) if you will need the policy for a period of time longer than 10 years. Term 5 insurance is not usually available other than as part of a group insurance package, and should often be avoided due to the higher costs over time, causing the overall cost of insurance to be higher than for a Term 20.

Creditor Insurance 101

Hello, everyone! Welcome to my Personal Insurance Information Series.  This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.

Heather

What is Creditor Insurance?

Creditor insurance insures a loan.  Mortgages are the most common to offer this, but it is also sometimes offered on car loans. There are several reasons why this is not an ideal type of insurance, but the most important reason is that it may not pay out when it is supposed to. 

You Should Avoid Creditor Insurance

Approval for this insurance is based on a few qualifying questions asked at the time you apply for the loan. It is not underwritten, and therefore not guaranteed to pay out if a claim is filed.  Instead, the underwriting and actual approval process are done at the time of claim (injury, death, or disability depending on the coverage).

It can be a nasty shock to someone who has just lost a spouse and believes their mortgage will be paid off, only to find out that they have been declined.  This is not something you want to have added on to everything else you are coping with after the death of a loved one.  

More Reasons To Avoid Creditor Insurance

Although that seems enough of a reason to avoid this insurance, there are several more reasons that it is far better to own your own policies.  The clearest way to illustrate this is with a direct comparison.  

Creditor insurancePersonal insurance
Lender owns the policyYou own the policy
Lender is the beneficiaryYou can pick the beneficiary
If you default on the payment of your mortgage it is also a default on your insurance payment. If you make your payments, you never lose your coverage.
Your coverage declines with the balance of your mortgage, but your payment does not decline.Your coverage stays at the amount you initially got the policy for.
The policy can get cancelled or go up in price.Your payment stays the same
The policy is underwritten at time of claim.The policy is underwritten before you are approved.
With most lending institutions you need to re-qualify medically when refinancing your mortgage.  This also applies if you want to move to another institution.The policy is not tied to your mortgage in any way.  Refinance, or move your mortgage without insurance concerns.
Protects your debt – i.e. the amount of your mortgage at the time of claimProtects your lifestyle – i.e. mortgage, income replacement, final expenses, children’s tuition, etc.
Loan officers are not usually licensed insurance representatives and cannot, by law, provide you with insurance advice. A licensed insurance representative can go over your insurance needs with you and make sure you get what you need.
Loan officers can be pressured to sell you loan insurance, and you need to check your statements to be sure if you do or do not have it.Licensed insurance representatives follow many rules to be sure we are acting in the best interest of the clients, not ourselves.

Get a Term Life Policy Instead

The personal insurance which is best suited to cover large debts such as mortgages is Term insurance.

Important note

While I do not recommend this type of insurance, it is important to have coverage to cover your debts.  If you currently have creditor insurance, do not cancel it until you have applied for replacement insurance and the representative tells you it is time to cancel the insurance you have.

The fourth article in this series discusses term life insurance, what it is good for and when you should buy it.

Different Types of Personal Insurance

Hello, everyone! Welcome to my Personal Insurance Information Series.  This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.

Heather

Creditor Insurance

Creditor insurance is most common in the form of mortgage insurance. Some other creditors will also offer insurance to cover your debt if you fail to pay.

If at all possible, I advise you to avoid most forms of creditor insurance. These policies are not guaranteed, and claims are often denied.

Life Insurance

Term Life Insurance is insurance designed to give high coverage at a low rate.  It fills an important need, but you should also have one of the other two types of life insurance as well.

Universal Life insurance (UL) is commonly sold as “Permanent Insurance” or “Whole Life Insurance”.  This is the most common long-term life insurance solution.

Participating Life Insurance (PAR) is the best life insurance policy.  It is not offered by all companies anymore. The participating stands for you getting to participate in the insurance company’s profits through dividends paid on your policy.

Disability Insurance

Disability insurance (DI) is designed to cover loss of income. It pays out monthly and there is a maximum amount that you are allowed to get.  Some industries are not eligible for this coverage.

Critical Illness Insurance (CI) covers more than 20 basic illnesses including heart attack, stroke, and cancer.  It is generally considered the next best thing to disability coverage. It pays out in one lump sum.

Group Coverage Policies

This is the coverage you get at work, as part of a group.  It usually has both health and life components, among other available types of coverage.

There is often the option for additional coverage with these policies but it is not something I would recommend getting.  When you get the coverage there is usually an information session and a coverage booklet provided. The problem is most people will never read the book, and they do not know what to ask at the information session.

Specialized Insurance Policies

Insurance companies sell some products that have a narrower focus than life, disability or critical illness.  Some are designed to provide a more specific coverage, like cancer guard, and some are designed for a specific purpose, such as buy and sell insurance, which is really just life insurance with a purpose.

The issue with these is just that most people don’t know they exist.  If you don’t know about them, the only way to find out is to have that all-important needs analysis with an insurance representative.

The third article in this series discusses the different types of creditor’s insurances that you can buy, why you probably shouldn’t and what you can do instead.

How To Buy Personal Insurance

Hello, everyone! Welcome to my Personal Insurance Information Series.  This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.

Heather

Find A Licensed Insurance Representative

The most important thing that you should know about buying personal insurance is that it must be sold by a licensed insurance representative.

Get A Thorough Needs Analysis

Your licensed insurance representative must meet with you and do a needs analysis of your situation before they can accurately recommend any insurance products for you

A needs analysis should include:

  • what is important to you
  • a review of your finances
  • the needs of your family
  • up-coming life changes

If an insurance rep approaches you and tries to sell you insurance without thoroughly reviewing your situation, they are more focused on what they want to sell than on what you need.  

The first step in getting good insurance is finding a good representative. Don’t hesitate to visit a few different agents and choose the one that feels best. Do not feel pressured into accepting a recommendation immediately, as it can require some thought and consideration.

Pay Attention To Policy Guarantees

After an insurance rep does a thorough needs analysis and counsels you on your best coverage options, they will submit your insurance application to the insurance company.

Underwriting is the process that an insurance company performs to determine whether they will approve you for insurance or not.  It is based on detailed information provided to them by your insurance representative. With guaranteed policies, the underwriting process is done before issuing a policy. 

Beware of policies that ask only a few simple questions in their applications. These policies are usually not guaranteed. When you make a claim against the policy, the company then reviews your eligibility in more detail. You may be denied.

Always ask about the underwriting process for each application you submit. Make sure that you know whether or not your policy is guaranteed!

Don’t Put Your Insurance Off Until Later

Take the time to do your research and find a good agent before purchasing personal insurance. That being said, don’t put it off for too long! Nobody likes to think about it, but you never know when you could get injured or die.

You also never know when you will become uninsurable. This means that you’ve had a life event or health condition that would cause an underwriter to deny your application for a policy.

Even young people can encounter life events that make them uninsurable. One 20-year-old lady I counseled was denied life insurance coverage because of complications during a previous pregnancy.

It is best to get your personal insurances established early in life. You can always upgrade your coverage as you mature and become more successful.

The second article in this series gives an overview of the different types of personal insurances that you can buy.