Life Insurance 101

LIFE INSURANCEWhat is life insurance?

Life insurance is a contract binding a life insurance company to compensate a beneficiary for the death of a person insured. If the insured dies during the contract period, the company will provide a cash payment to the beneficiary. Life insurance is used to protect the economic value of a human life with regards to those who may be financially dependent upon it. Life insurance has many uses for both individuals and businesses.Life insurance is sold by Life insurance Companies. There are three principal corporate structures types for insurance companies in Canada; stock companies, mutual companies and fraternal societies. The following video expands on corporate structures for life insurers.


Who Issues Life Insurance products?

There are Life Insurance Companies who posess charters to provide a series of products that are called life, health and disability insurance as well as all annuity plans. They can bes sold as individual plans or on a group basis. Accidental death and disabilitiy as well as health insurance is sold by Life insurers but may also be sold by property & casualty insurers. (The folks that offer home owner, auto and other similar products). Life insurers are chartered either by the Canadian federal government or one of the Provincial governments. Federally chartered life insurers are accountable for solvency, (financial stability) to the federal authority. Product detail and distribution oversight is left to the province in which the products are offered. Provincially chartered life insurers are regulated, for solvency by the province that issued the charter. The distribution and prodct oversight is the same as the fereally charterd life insurers.

There are several corporate legal structured to Life insurers. The following video will elaborate.

Some common applications of Life insurance products include:

Individual Uses

   Funeral - Life insurance proceeds can ensure that there is enough money for last expenses, among which is proper funeral and burial expenses.

   Debt - Other finalexpenses would include personal bills, credit card debt, student loans, and personal notes can be covered by life insurance in the event of an individual's death.

  Mortgage Protection - The proceeds of a life insurance policy can pay off the balance of a mortgage or provide an income stream to pay monthly mortgage or rent payments.

   Income Replacement - In the event of an individual's death, life insurance proceeds can provide a supplemental income stream to ensure that the surviving family members are able to maintain the same standard of living.

   Education - Life insurance proceeds can ensure that the education costs of insured's children are covered.

   Taxes - unrealized capital gains tax liability can be pre-funded using life insurance to preserve the value of an estate.

   Donations/Gifts - An individual can use a life insurance policy to fund a donation to a charity or leave a gift to a family member.

Business Uses

Key-Person - A life insurance policy can be used to protect a business from the loss of income and profits caused by the death of a key employee. For more information go to Key-Person Insurance in the advanced life section.

Business Continuation - Life insurance can be used to fund a buy/sell agreement or stock redemption plan to determine enable a partner or group of employees to buy the business interest of a deceased partner. For more information go to Business Continuation Planning in the advanced life section.

Business Loans - Life insurance protection on a key employee or business owner can be used to pay off the debts of a business in the event of that individual's death.

Employee Benefits - Life insurance protection for employees is commonly included in company employee benefits plans.

Determining Your Life Insurance Needs

There is no magic formula to determine how much life insurance you should have; however, there are a number of factors that should be considered when estimating how much life insurance you should carry. They include:

Final Expenses - These could be unpaid hospital bills, funeral expenses, unpaid debts, probate costs, and estate and inheritance taxes.

Readjustment Fund - This may be used to cushion the immediate lifestyle adjustment that a family must make when a loved one dies. The family may be forced to move, or the surviving spouse might have to look for a new job. In addition, a working spouse may find it difficult to return to work immediately after the death of a partner. The readjustment fund allows for adequate bereavement due to loss.

Supplemental Income - After the readjustment period, there should be a consistent income stream to help pay for the family's living expenses, such as mortgage payments, monthly bills, and daycare.

Educational Funds - Adequate funds should be available for the children’s education. This might include elementary school, high school, and college.

Retirement Fund - There should also be adequate funds available to ensure that the spouse can retire comfortably.

These are some factors that you should consider carefully when estimating how much life insurance you need. Everyone's life insurance needs are different but, in general, an individual's needs are greatest from the time they start their careers or a family until they reach retirement, at which time many individuals' needs for life insurance diminish. It is important to remember that you should review your life insurance needs annually to account for changes in your family's lifestyle. Use our life insurance needs calculator to help you estimate how much life insurance you require.

Types of life insurance

Term Life Insurance

Term life insurance provides protection for a specified period of time. A death benefit is paid to the beneficiary if the insured dies within a specified period of time while the policy is still in force. Many term life insurance plans can be converted to permanent life insurance plans without evidence of insurability. Two types of term life insurance are yearly renewable term and level premium term.

Yearly renewable term life insurance has premiums that are initially low; however, the premiums increase substantially as the insured gets older. These plans have diminished in popularity due to the introduction of level premium term life insurance.

Level premium term life insurance has premiums which remain level over a specified period of time. These plans have premiums that remain level for a period of 5, 10, 15, 20, 25, and 30 years. After the initial level period expires, the annual premium increases each year, subject to a guaranteed maximum.

Although the initial premium of a level term policy is higher than the initial premium of a yearly renewable term policy, the level term policy generally costs much less over a specified period of time. For example, compare the premiums between a yearly renewable term plan and a 20-year level premium term plan for $500,000 of life insurance.


Level Premium Term

Year 1-20 (Age 35)  = $495.00

Year 21+ (Age 56)  = $9,900.00

The cash outlay of the level premium term is less than 1/3 of the total cash outlay for the yearly renewable term.

In general, term life insurance is suitable when your life insurance needs are temporary or your life insurance needs are long-term but your budget does not permit the higher premiums of permanent life insurance.

In general, term life insurance is suitable when your life insurance needs are temporary or your life insurance needs are long-term but your budget does not permit the higher premiums of permanent life insurance.

Permanent Life Insurance

Permanent Life insurance means just that . If you continue to pay premiums it will outlast the pife insured and pay a death benefit. Term life insurance can end prior to the life insured. Premiums for a permanent policy can run typically to age 100 after which it just continues the coverage without further premiums. Shorter premium paying periods can be purchased by paying a higher premium. There are two common types of permanent plans. Whole Life, particiating or non participating and Universal Life. Both plan types typically can have cash surrender values accumulating with time. Typically permasnent plan premiums do not increase with time (Exception, the YRT version of Universal Life)


Beneficiary designations

A beneficiary is a person or entity named to receive a portion of the death benefit of a life insurance policy. The owner of a life insurance policy may name multiple beneficiaries, and most insurance companies permit the policy owner to change beneficiaries.

There are two types of beneficiaries: primary and contingent. A primary beneficiary has the first claim to the proceeds of a life insurance policy should the insured die. There may be more than one primary beneficiary and the proceeds do not have to be shared equally. The policy owner of a life insurance contract may also name a contingent or secondary beneficiary. The contingent beneficiary has claim to a portion of the death proceeds should the primary beneficiary(s) be removed or die prior to the death of the insured. There may also be more than one contingent beneficiary.

Many individuals designate a spouse as the primary beneficiary of their life insurance policy and the children as contingent beneficiaries. You should consult with an estate-planning attorney prior to making a minor child a beneficiary of a life insurance policy. In addition, anyone contemplating making their estate the beneficiary of their insurance policy should use extreme caution and consult with an estate planning attorney prior to doing so. ~






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