Your Money: Insuring your future
Expert advice can help those trying to understand what product suits them best
Life insurance: What is it? How much do you need? When do you need it? The experts help unravel the types and timing to provide for any of your future needs.
What is life insurance, what are the different types, do you need it, and how much is enough? Kelvin Mangaroo, owner of Ratesupermarket.ca, an independent company that compares financial products, said if you have family and income to protect or debt to pay off, life insurance is a good option. Even if you’re single, it pays to lock in insurability while you’re young and healthy, he said.
The main types of life insurance, which pay money to a person’s beneficiaries when they die , are term life, universal life and whole life.
Hu Brietkopf, an independent insurance broker in Vancouver, likened buying term life insurance to renting a house and said buying universal or whole life insurance is more like buying a house with mortgage payments that build equity. Term life is temporary: when the policy ends, it’s over. Universal and whole life are permanent and include investment components, Brietkopf said.
Term life is life insurance that is payable when the insured dies, as long as it occurs within a specific amount of time, determined by the term of the policy. It is typically the cheapest type of life insurance, but the costs increase as a person ages.
The two types of permanent life insurance are distinguished by the type of investment that goes along with the policy. Universal life insurance policies are typically invested in funds that are similar to mutual funds, with potential for higher returns, but also higher risk. Investors can top their investments with extra funds if they like.
Whole life insurance also includes an investment component, but the much smaller returns are guaranteed, similar to guaranteed investment certificates. The premiums for this type of insurance are usually fixed, as is the investment amount.
Whole life is typically the most expensive life insurance, but as a person ages the premiums do not rise.
Brietkopf said whole life is usually a better choice for older people, while universal life can be better for younger people because they can leave their money invested for the long term. He also said he can sometimes find life insurance even for people who have been turned down due to a health problem.
As far as how much life insurance you need, Mangaroo said it depends on your needs and what you can afford.
“All policy types have their merits; it’s a question of insuring the correct amount, and if the budget allows, considering more comprehensive whole life or permanent options,” Mangaroo said.
“The best plan fits your budget, providing the needed coverage to maintain the lifestyle of the surviving family members.”
Brietkopf said the “magic formula” to calculate how much insurance a person needs is five- times annual income, plus whatever is owed on a mortgage, plus whatever it will cost to pay for any children. Recently, The Vancouver Sun ran a story about a court case in which a widow was found not to be entitled to all of her husband’s $ 1- million life insurance policy after he died in a plane crash in 2008.
The judge ruled that because the flight he was on was chartered by the company he worked for, it did not fall within the accidental death provisions of the policy because the flight was not a common carrier as required by the insurance.
The wife was only entitled to $ 25,000 under the general terms of the policy, not the $ 1 million covered in an accidental death rider.
Brietkopf was not familiar with the court case, but said accidental death insurance is different from basic life insurance. “For life insurance, as long as you’re dead and have a death certificate, you will be paid,” Brietkopf said. When asked if people should be concerned they will not be covered due to “fine print,” Mangaroo said life insurance is a complicated product and people should seek expert advice from a life insurance agent.
“Agents are a great option as they are product experts and know the fine print on policies,” Mangaroo said. “They work on behalf of the consumer, have access to multiple insurers, and their services are free for consumers as they’re compensated by insurers once a policy is issued.”
It’s a common myth that suicide is never covered by life insurance. Mangaroo said suicide typically is covered as long as 24 months have passed since the policy was issued.
“This suggests if someone is contemplating suicide when taking out a policy, should they live 24 months, they are probably no longer thinking about it,” he said.
It is important, Brietkopf said, to note that mortgage life insurance differs from life insurance in that the coverage is reduced as you pay your mortgage off, and premiums typically rise as the mortgage holder ages.
Also, if the insured dies, the money all goes to the bank to cover the mortgage, not to the beneficiaries.