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Editors Note: This article is excerpted from Tools & Techniques of Life Insurance Planning, 6th edition, which delivers detailed information about the entire range of life insurance products that can be used by estate and financial planners in a wide variety of circumstances. It includes planning techniques for retirement income needs, estate and gift tax avoidance, estate liquidity needs, and long-term care planning.
At best, life insurance is a very complicated product that is extremely difficult to evaluate and compare. Life insurance policies are complex amalgams of varying legal, financial, and probabilistic elements that cannot really be reduced to an all-encompassing unitary measure for comparison purposes. However, there are a number of commonly used measures or methods for policy comparison that can be of aid in evaluating purchase alternatives. Keep in mind that none of these methods does, or could, take into account all of the factors that should be considered when making the purchase decision. But, if planners use several methods and they keep in mind the strengths and weaknesses of each during the comparison process, these methods will be quite helpful in at least eliminating policies that should not be considered. The following are commonly used policy comparison techniques.
Method 8: Belth Yearly Price Of Protection
The Belth yearly price of protection method works like this:
Step 1: Accumulate the investment in the policy for one year at an assumed rate of interest. The investment is the sum of:
a. the cash surrender value at the end of the previous year; plus
b. the current premium.
Step 2: Compute the year end policy surrender value. The year-end policy surrender value is the sum of:
a. the year end cash surrender value; plus
b. any dividend.
Step 3: Subtract the year end policy surrender value from the years accumulated investment.
Step 4: Divide the result of by the years net amount at risk in thousands to derive the cost of protection for the year. Stated as a formula, the computation is:
Cost per $1000
The result is an estimate of the cost in any given year of the net death benefit . The policy with the lowest yearly price of protection in the most years is generally the contract that should be selected under this method.
As a complement to the yearly price of protection method, Belth has developed: benchmark costs per thousand dollars of term insurance for various age ranges, see table below; and rules of thumb for using this method in replacement situations. He describes the benchmark rates as follows:
JOSEPH BELTHS BENCHMARK PRICE
Belth suggests the following rules of thumb for applying the benchmarks in replacement situations:
What Are The Main Types Of Life Insurance Cover
Theres a wide variety of life insurance policies designed to suit different needs. These are some of the most popular:
Level-term life insurance pays out a fixed amount of money, for a fixed period of time, which you choose when you buy. It can help cover debts like a mortgage. If you die within the chosen time period, the policy pays out a lump-sum to your beneficiaries. But if you die after the period, there will be no pay out and your policy has no cash-in value at any time unless a valid claim is made.
Increasing cover because inflation might reduce the value of your cover over time, you might want to add increasing cover. Here some providers offer you the choice of increasing the level of cover by a set amount every year for example, 3% or 5% or you may opt instead to match the level of cover to increases in the Retail Prices Index. Your premiums will increase also to reflect the additional level of cover. Increasing cover can be useful to help account for things like increasing prices or pay rises during the term of your policy. However, you should make sure that you review your cover regularly to make sure it still meets your needs.
How Much Life Insurance Do You Need
You can calculate how much life insurance you need with a basic equation:
= Your life insurance need
Examples of financial obligations you want to cover might include income replacement, mortgage payments, college tuition and other large debts.
Examples of existing assets that can be used toward bills might include your retirement savings and other types of savings , and existing life insurance.
Group Life Offers Low Coverage Amounts
Employer life insurance provides fairly low coverage, usually only equivalent to one to two yearsâ worth of salary. But experts, including senior operations manager of Policygenius’ advanced planning team Nicholas Mancuso, suggest people aim for 10-15 times their income in life insurance coverage.
If your income is $50,000 per year, for example, you might need $500,000 or more in coverage to meet your financial obligations, but a basic group policy may only equate to $100,000 of coverage, leaving a $400,000 coverage gap.
Keep in mind that group coverage rates are based on community rates, which means as you get older , group coverage becomes more expensive than buying an individual policy with the same amount of coverage.
In short, donât automatically pass up group life insurance, but donât dismiss other options, either. Make sure it fits your needs and see how you can work it into your private coverage.
Are Life Insurance Pay Outs Taxed
Life insurance payouts arent usually liable to income tax or capital gains tax. But your estate could have to pay inheritance tax on a payout from your policy. Writing your life insurance policy in trust should mean your estate doesnt have to pay IHT. Plus, by writing your policy in trust your beneficiaries could get the payout quicker. Tax rules can change though, and they depend on your personal circumstances. It might be worth getting financial advice, so you can plan better for your requirements.
How Much Life Insurance Cover Do You Need
How much life cover you need depends on what you want your pay-out to do.
Things to consider when working out your life insurance cover amount are:
- If you want it to support your loved ones after you die, youll need to think about how much money theyd need to keep on living comfortably without you. Think about day-to-day living costs, rent or mortgage payments, and any other financial commitments they may struggle to meet
- If you have any ongoing debts, its worth factoring these in too
- If you have a mortgage, you might want your pay out to cover it fully. If so, think about how much you have left to pay and factor this into your cover amount Or you might just want your pay-out to act as inheritance for your children. Here, youd need to think about exactly how much youd want to leave behind for them
Checklist: What You Need To Get A Life Insurance Quote
Life insurance companies want a lot of information from you before they’ll generate a quote. Your quote is specific to you, your situation, your health and what you want from a policy. Companies use this information to determine how risky it will be to insure you.
You can make the process of getting a life insurance quote faster by having the necessary information on hand. You’ll need to provide some or all of the following information when getting your quotes:
- Whether or not you smoke
- How much you drink
- Lifestyle habits, like how often you exercise
- General information about your overall health
- How much coverage you want
- How long you want your policy to last
About The Data In This Tool
This tool reports data for all policies sold by an insurer for the type of life insurance cover and the sales channel selected. You can contact an insurer to understand the differences between individual insurance policies they offer.
Data in this tool is reported by life insurers and friendly societies to the Australian Prudential Regulation Authority . For more life insurance claims data see APRA’s life insurance claims data collection page.
APRA licences insurers to operate in Australia and monitors them using a number of rules. These rules are designed to ensure that they remain financially stable and are able to keep the financial promises they make to their policyholders.
The data in this tool includes:
1. Claims accepted rate – the percentage of claims an insurer accepted for payment out of all claims that went to a final decision during the period. Reasons why an insurer may not accept a claim include:
- an exclusion clause applies. For example, the person claiming had a pre-existing condition that is excluded under the policy.
- a person making a claim forgot or chose not to tell the insurer information that was required when signing up to the insurance policy.
- the claim does not meet a definition in the insurance contract. For example, a person claiming does not meet the requirements for the definition of a heart attack.
Reasons why a claim can take longer to finalise include:
- the claims decision
Can I Cancel My Life Insurance Policy
Yes, you can, but youll no longer be covered by the policy and wont get a pay-out if you die. You typically have 30 days to cancel a new policy without any charge. Check your policy for the exact details of what you need to do.
Contact your insurance provider to cancel your policy. Youre unlikely to be entitled to any refund of the premiums youve already paid.
What Is Permanent Life Insurance
Before we look at how to compare policies, it’s important to understand what permanent life insurance is. Permanent life insurance is a type of insurance policy that doesn’t have an expiration date, which is a characteristic of term life insurancea contract that expires if the insured party is still alive after a certain age.
Permanent life insurance generally has two components or benefits. The first is the death benefit, or the amount paid out to the insured’s beneficiaries after death. The second is the cash value, which builds up over time. The policyholder can borrow against this amount or even withdraw from the savings after a certain point.
How Much Is Supplemental Life Insurance
There is no average cost of supplemental life insurance. Instead, the supplemental life insurance company comes up with the price to be paid by every group.
They do so by evaluating policy designs for every claim, the demographics of the group, past claims, and life expectancy.
Supplemental life insurance rates are based on expenses, expected claims cost, and profit margin of each group.
Your employer determines how much supplemental life insurance you can buy. Many organizations will set limits based on your salary.
Maximum coverage amounts typically range between $250,000 and $500,000, but some high-level managers can have coverage up to millions.
The amount of your premium may depend on your organization, age, and choice of coverage level.
For example, if you are less than 30 years old, the cost per $1,000 of coverage could be $0.0140, while someone who is over 70 years old may have to pay $0.5000 per $1,000 of coverage.
Top Tips For The Life Insurance Medical Exam
A fully underwritten life insurance policy typically requires that you take a paramedical exam to verify the information you provide on your application. Insurers use companies such as Exam One and APPS-Portamedic to send a nurse or paramedical professional to your home or workplace to check your height, weight, pulse and blood pressure and to take blood and urine samples .
Some insurers require an electrocardiogram, EKG, test to monitor heart activity for older applicants or applicants applying for more than $1 million in coverage. Some also might require an X-ray or treadmill stress test. If youre 70 or older, you might have to take an additional test of cognitive ability.
Its important to take the medical exam seriously because it will impact the life insurance quote youre offered. To prepare, take the following steps:
24 hours before the exam: Limit salt and high-cholesterol foods such as red meat. Avoid over-the-counter medicine such as antihistamines and nasal decongestants.
12 hours before the exam: Avoid alcoholic beverages and strenuous exercise, which can raise blood-pressure levels. You also might have to avoid eating and drinking anything other than water during the 12 hours before your exam.
One hour before the exam: Avoid caffeine and nicotine. Drink a glass of water to make providing a urine sample easier.
What Happens If The Life Insurance Policyholder Commits Suicide
On all life insurance policies, there is a suicide clause exclusion. Typically, it states that if the policyholder commits suicide within the first two years of the policy being active, then the beneficiary receives none of the benefits, and in most circumstances, will be only paid a sum of the premiums paid.
Even if the policyholder commits suicide more than two years after they took out the policy, the beneficiary may still be denied their claim. It is important to understand the terms and conditions associated with your policy. If you or a loved one are considering suicide, please seek professional help. Crisis Services Canada is one organization that offers suicide prevention and support 24/7.
Lots Of Fun Lets Do One More Life Insurance Comparison
Loving the enthusiasm. For our third example, lets turn to Melvin. Hes 47 years old, is in good but not excellent health, doesnt smoke and lives in the City by the Bay: San Francisco. He wants a 20-year policy with a coverage amount of $100,000, and he wants his premiums back at the end of the term. With those requirements, he could find a policy for as little as $81.
His premiums are a bit higher than Janes because hes older, and he wants the money-back guarantee of a Return of Premium policy. On the other hand, theyre lower than Dales because Melvin is in good health and doesnt smoke. Plus, he only wants coverage for the next 20 years, and for a much smaller amount than Dale.
As you can see, there are a lot of things that go into determining a life insurance premium. If youre thinking about buying life insurance, its important to understand these factors, as well as the types of policies that might work for you. Once youve settled on a specific policy, its time to compare life insurance quotes, and, finally, partner with the company youre most comfortable with.
Can I Have More Than One Life Insurance Policy
Yes, you can. For example, you can have your own life insurance policy and also be covered by your employers policy. You can take out more than one policy if your circumstances change to cover any shortfall in your current cover. For example, if you have a second family. You can even choose different types of policies for different financial commitments, like a mortgage.
You dont have to buy all the policies at the same time and its worth regularly reviewing your life insurance cover to make sure there wont be any shortfall.
Determine The Type Of Life Insurance You Want
When it comes to comparing life insurance companies, you want to determine the types of coverage theyre known for carrying well. Once youve considered term vs. whole life insurance and figured out what kind of coverage sounds right for you, youll have a better idea if you should compare term life insurance companies or compare whole life insurance companies.
What Is Dual Life Cover
Dual life cover also insures two people under the same policy but a claim can be paid out on both deaths. If one person dies, a claim is paid out and the policy continues in the name of the survivor. If the second person dies during the term of the policy, a second payout is made. For this reason dual life cover is more expensive than joint life cover.
How To Compare Life Insurance Policies
When shopping for life insurance, youre often told to compare policies. However, that can be a fairly complicated undertaking. After all, there is much more to each life insurance policy than the premiums themselves. Not only can each policy have completely different features and characteristics, you also need to consider how the structure of the policy matches up with your personal objectives.
Sure, it sounds complicated, but knowing what to look for helps greatly when trying to determine the best life insurance policy for you. Heres what you should know when comparing life insurance policies:
What is the structure of the life insurance policy?
There are two primary types of life insurance: term life insurance and whole life insurance. Term life insurance provides coverage for a set period of time . After the term has expired so does the life insurance policy. Whole life insurance on the other hand is permanent, and will pay a cash benefit after the insured passes on. Youll need to decide which policy structure is best for you before digging deeper into the features and benefits of each plan.
How do you want to use your life insurance?
Are there any optional features?
Different life insurance policies include different optional features, or riders. For example Canada Protection Plans life insurance plans can provide the insured with up to 75% of their benefit while still living if they are diagnosed with a terminal illness.
Can you convert your policy?
Am I Covered By My Employers Life Insurance
You might be. Some companies offer their employees death in service benefit. This is usually a multiple of your salary for example, three or four times what you earn and is paid out as a tax-free lump sum if you die while youre working for the company. You should be told about it when you join a company.
I’m Single With No Kids Do I Still Need Life Insurance
That depends. Do you have students loans that need to be paid off, credit card debt or a mortgage? If so, you might want to purchase a policy sooner rather than later.
Even without debts, there is still the cost of your final expenses that needs to be considered. It can cost anywhere from $5,000 to $15,000 to bury someone in Canada. If you don’t have that in the bank and you don’t have a life insurance policy, those expenses may be left to your loved ones. That can be a lot for them to deal with when they’re grieving your loss. Preventing loved ones from having to face this financial burden at the time of a sudden or unexpected death is why many single people opt for life insurance.
Simplified Issue Life Insurance
Simplified issue life insurance is a type of whole life insurance that falls under the final expense category.
With simplified issue life insurance you can skip the medical exam. Thatâs the “simplified” part of this policy type. This is also known as a type of “no exam policy.âYouâre not out of the woods completely, though. You donât need to go through the medical exam, but you do need to fill out a health questionnaire, answering questions about smoking habits and serious illnesses.
If youâre over a certain age, have severe underlying medical conditions, are unable to independently fill out the application, or are a smoker, you may not qualify for simplified issue life insurance.
Drawbacks of simplified issue
People in poor health may have to take the exam if they have too many health issues, and they could be flat-out denied by insurers. For healthier people in a hurry, it can be a way to skip scheduling the paramedical exam, which adds some time to the underwriting process. But this benefit comes with a major financial drawback: it tends to be more expensive than a term policy.
Where Can I Find A Supplemental Life Insurance Company
You can find a supplemental life insurance company in almost all states that offer life insurance policies. These companies will provide you with supplemental life insurance coverage.
In most cases, people buy supplemental life insurance through their employer, but it is available from private insurers.
To purchase a policy, most supplemental life insurance companies require you to have a primary life insurance policy first.
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Is Term Life Insurance Right For Me
Term life insurance is often popular with younger people who are just starting their families, new homeowners with a mortgage, or those who wish to provide funds to replace income for loved ones if they were to die. Consider this policy if you want to choose how much coverage you want for a specific length of time.
What Is A Life Insurance Beneficiary
The beneficiary is the person who will receive the payment of your insurance policy. You can name anyone you want â your partner, a family member, a dependent, even a charity. If you want, you can even name more than one beneficiary, and instruct the insurance company on how to allocate the premiums. Your beneficiary can be either revocable or irrevocable, and the designation is exactly what it sounds like. If your beneficiary is irrevocable, you need their signed agreement to change who is named. With Quebec life insurance, if you name your spouse as beneficiary, they automatically become irrevocable unless you explicitly name them as otherwise.
Which Life Insurance Company Is The Best In Canada
Although popular life insurance companies include Canadaâs big three, Sun Life, Manulife, and Great-West Life, the best company for yourself is dependent on your own needs. Each provider will offer you a different quote, and not all companies offer the same types of policies. So be sure to compare your life insurance quotes with us to find the company that will suit your needs for the best rate and value.Â
Can You Get Life Insurance If You Have A Pre
You can get life insurance with pre-existing medical conditions. But expect to pay more and have less insurers to choose from.
You need to tell insurers about any pre-existing conditions you have. If you dont, you wont be covered for them.
When you take out cover, youll be asked questions about your medical history.
You could choose to exclude the condition from your cover, which might lower your premiums. But it does mean if you die as a result of that condition, therell be no payout.
How Can I Get Better Rates On Life Insurance In Canada
Remember, life insurance is a personal choice, but some things to take into consideration are:
- Term life insurance is less expensive than permanent or whole life insurance
- Apply for life insurance as soon as you can. The younger and healthier you are, the better your rates
- Fast before your medical exam so your levels are more normalized
- Dont smoke: smokers pay twice as much than non-smokers for life insurance
- Compare rates using a site like InsuranceHotline.com to see the range of life insurance quotes available to you
If you have any other questions, the life insurance rep you speak with will be able to answer any of your questions.
The Constant Change In Your Insurance Needs
As you get older, your expenses the things you spend on change. And so will your specific life insurance needs.
For instance, even as a single young adult, youd still want to get insurance for both current and future financial needs. Right now, your primary may be to safeguard your family from the expensive costs of funerals.
In this case, you may want to obtain term life insurance quotes for policies that meet your requirements
When you become a parent, your primary reason to purchase this type of insurance policy is to ensure you can leave your children with financial support. Not just for their needs as they grow, but also for their college education.
A whole life insurance calculator will help you determine how much this specific type of life cover will cost you. Keep in mind that a whole life policy not only provides you with a risk management tool, but also an investment asset.
Although age is the primary influencer to life insurance premiums, you have plenty other factors to consider. Which brings us to the next topic: Your current health.