Buy Best Term Life Insurance Vancouver — Life Insurance Policy 101 Guide
Are you looking for income and asset protection for your family, siblings or parents in case you got disabled or die due to an accident?
There are several types of life insurance, including term life, term-100, whole life and universal life insurance, and the marketplace offers many variations of each type.
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What “term” means in Life Insurance Policy
Term life insurance is a contract that specifies that, in exchange for a premium, the life insurance company promises to pay a death benefit if the life insured dies within the fixed term of the
contract.
The “term” is the period of time during which the coverage is guaranteed to remain in place, as long as the policy’s premiums are paid.
The most common terms for life insurance are 1 year, 5 years, 10 years or 20 years, or to a specific age (e.g., to age 60).
However, other terms, such as 3 years, 15 years or 30 years, may
also be available, depending on the insurance provider.
What Are the Age limits?
Most insurance companies will not provide term insurance coverage past a specific age, often around age 75 or 80, simply because the risk of having to make a payout is too great. This means that they will stop issuing new policies at about age 65 or age 70, depending on the policy’s term.
When insurance is provided to older ages, the premiums are very expensive.
Policyholder vs. life/lives insured
The policyholder is the person who purchases the life insurance contract, or who later acquires ownership of it via gift or assignment. The policyholder is responsible for making all decisions regarding the contract, including naming the beneficiary of the policy, paying the premiums, cancelling the policy, or assigning the policy to another individual.
Life insurance — Term life insurance Pro’s and Con’s
The life insured is the person on whose life the insurance contract is based. If the life insured dies during the term of the life insurance policy, then the life insurance company must pay the death benefit. Some insurance products may also refer to the life insured as the annuitant.
The policyholder can also be the life insured, but this does not have to be the case.
EXAMPLE
Sandra would like to leave a legacy to her adult son, Tristan, when she dies,
so she bought a $300,000 10-year term life insurance policy on her own life,
with Tristan named as the beneficiary. Sandra is both the policyholder and the life insured.
Sandra works for ABC Ltd., and she is very important to the success of the
business. ABC Ltd. bought a life insurance policy on Sandra’s life. ABC Ltd.
named itself as the beneficiary, and they plan to use the death benefit to help
them recruit and train a replacement if Sandra dies. In this case, Sandra is the
life insured, but ABC Ltd. is both the policyholder and the beneficiary.
Sometimes the policyholder is referred to as “the insured,” which is not the same thing as “the life insured.” A policyholder is referred to as “the insured” because he bought protection from the financial loss that would otherwise result if the life insured dies.
Single life Insured
Most term insurance policies are single life policies, meaning that only one person is insured, and the death benefit will only be paid if that person dies within the term of the policy.
Joint first-to-die insurance
While most life insurance policies are single life policies, there are two types of life insurance policies that are based on the lives of two or more people.
With a joint first-to-die life insurance policy, a single amount of coverage is placed on two or more lives insured, and the death benefit is paid out upon the death of the first person to die.
Joint first-to-die life insurance coverage might be appropriate whenever two or more people share
a debt obligation.Life insurance
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EXAMPLE
Sue and Cindy are common-law partners and they recently bought a house
together, with an outstanding mortgage of $250,000. While they can
comfortably manage the mortgage payments with their combined incomes, if
one of them were to die, the survivor would have a hard time making those
mortgage payments. To ensure that the survivor would be able to keep the
house Sue and Cindy took out a $250,000 10-year term joint first-to-die policy,
naming the survivor as the beneficiary. So, if Sue dies, Cindy will receive the
death benefit and can pay off the mortgage, and vice versa.
Joint first-to-die life insurance coverage is also often used to fund business buy-sell agreements,
as discussed further in Chapter 8 Business life insurance.
Joint first-to-die contracts usually terminate upon the death of the first person to die. However,
some contracts give the surviving life insured the choice of continuing the same level of coverage
on their own life under a new policy, without having to provide proof of insurability. 6 This can be
particularly advantageous if the survivor’s health has deteriorated to the extent that he would
otherwise find it difficult to obtain insurance. Usually, this option must be exercised within a certain
time after the first death (e.g., 30 days).
EXAMPLE
(cont.)
Four years after Sue and Cindy bought their joint first-to-die policy, Sue was
killed in a car accident, and Cindy received the $250,000 death benefit. Cindy
and Sue adopted a baby two years before Sue’s death, and Cindy wants to
make sure the baby is provided for if she dies. For health reasons, Cindy
might find it difficult to buy life insurance with reasonable premiums. Luckily,
their joint first-to-die policy gives Cindy the option of continuing coverage of
$250,000, as long as she exercises the option within 30 days of Sue’s death.
A joint first-to-die life insurance policy on two lives is typically less expensive than two separate life
insurance policies of the same coverage amount on each life individually. This is because the
insurance company only assumes the risk of paying out one death benefit under the joint policy,
while it risks having to pay out two benefits if two separate policies are purchased.
Joint life insurance should not be confused with combined insurance, which is a marketing concept.
Some insurance companies allow two individual policies to be purchased under a single insurance
contract. The advantage is that only a single administration fee is charged, and a small discount
6. “Proof of insurability” refers to providing sufficient evidence of good health to the insurer so they are
willing to undertake the risk of providing the desired coverage. Essentially it means undergoing some form
of the underwriting process discussed in Chapter 9.Life insurance
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on the premiums may also apply. A combined insurance contract will pay out two separate death
benefits if the lives insured die at the same time during the term of the contract. If only one of the
lives insured dies, the coverage will continue for the other life insured at single person rates.
2.2.3 Joint last-to-die
With a joint last-to-die life insurance policy, a single amount of coverage is placed on two or more
lives insured, and the death benefit is paid out upon the death of the last person to die.
Joint last-to-die life insurance policies are most appropriate when the risk being insured against
does not arise until the death of the last person covered by the policy. One such risk is the tax
liability that can arise upon the death of the second spouse.
When a person dies, he is deemed to have disposed of all of his capital property for its fair market
value just before he died, and this can result in a significant taxable capital gain for his estate. An
exception to this rule occurs if the property passes to his spouse or common-law partner. In this
case, there is no deemed disposition of the property until the spouse disposes of the property or
dies, which is when the large tax bill can arise. Couples therefore often use joint last-to-die life
insurance to pay the tax bill on the death of the second spouse, particularly with respect to
property such as a cottage or a business that they want to pass on intact to their children.
EXAMPLE
Hamish and Elizabeth, both aged 55, bought a cottage 20 years ago and it
has appreciated significantly in value. They would like the cottage to pass to
their children when they die, but they are worried about the income tax liability
at death, which their accountant has advised them could be more than
$100,000. If Hamish dies first, his share will go to Elizabeth and it will not
trigger a capital gain because of the spousal rollover rules. However, when
Elizabeth dies after him, a joint last-to-die insurance policy would ensure that
the estate has enough money to pay this tax bill.
However, because term life insurance is usually not available past age 65 or 70, except at great
cost, joint last-to-die life term insurance policies more commonly take the form of permanent life
insurance policies.
2.3
Death benefit
The death benefit is the amount that the insurance company will pay if the life insured dies while
the policy is in force. Term insurance policies are purchased for an initial amount of coverage,
which is called the “face amount.” However, the death benefit of a term insurance policy may
increase or decrease over time, depending on the type of policy, as shown in Diagram 2.1.Life insurance
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DIAGRAM 2.1
Death benefit for level, decreasing or increasing term insurance
2.3.1 Level term
The majority of term life insurance policies offer a level death benefit, meaning that the death
benefit equals the initial face amount, regardless of when the life insured dies during the term of
coverage.
A level death benefit is most appropriate when the insurance need is not expected to change
significantly over the term of the contract.
EXAMPLE
Brad borrowed $100,000 from his father, Steven, to start a new business.
Brad promised to pay it off in a lump sum in five years, when Steven plans to
retire. Knowing that his father needs the money to be able to retire, Brad
wants to make sure that he can repay the loan, even if he dies. Brad
purchased a 5-year term policy with a level death benefit of $100,000.
Many people who buy term life insurance often ignore the fact that their needs might change over
the term of the policy. They buy a policy with a level death benefit because it is simple, what they
are most familiar with, and most often promoted. However, this means they may be under-insured
or over-insured at some point during the term.
2.3.2 Decreasing term
Decreasing term insurance provides a death benefit that decreases over the course of the term,
while the premium remains level. The premium on a decreasing term policy with an initial face
amount of $100,000 should be less than the premium on a $100,000 level term policy. This
reflects the fact that the amount at risk for a decreasing term policy declines over time.Life insurance
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Decreasing term insurance is most often used by people who have mortgages, because the
amount at risk (i.e., the outstanding mortgage) decreases over time. In fact, banks commonly
encouraged their mortgage customers to buy “mortgage insurance,” which essentially is
decreasing term insurance, sold as group insurance by a company affiliated with the bank.
EXAMPLE
Ranjit and Alisha bought their first home in 2001 with a $200,000 mortgage
amortized over 25 years. They bought a joint first-to-die $200,000 25-year
decreasing term insurance policy to ensure that if one of them died, the other
would be able to pay off the mortgage.
Few insurance companies currently offer decreasing term insurance for individuals. As noted
above, it is mainly offered on a group basis.
2.3.3 Increasing term
Increasing term insurance provides a death benefit that increases over the course of the term. The
increase in the death benefit is usually applied at predetermined times, such as annually or every
five years. The increase in the death benefit can take the form of a fixed dollar amount (e.g.,
$50,000 every fifth year) or a fixed percentage (e.g., 5% annually). Less commonly, it can also be
tied to inflation (e.g., increased annually by the Consumer Price Index (CPI)).
The premiums for an increasing term policy usually increase at the same time as the death benefit
increases, and by a proportionate amount. For example, if the death benefit increased by $10,000
on an initial $100,000 policy, the premium would also increase by 10%.
Increases in the death benefit are usually restricted, either by a cap on the maximum death benefit
(e.g., 150% of the original face amount), or a cap on the number of increases (e.g., every year for
10 years).
Increasing term insurance has become increasingly difficult to find in Canada, but it is still offered
in the United States. In Canada, the same effect may be achieved by adding a rider to the policy.
Riders are discussed in Chapter 5 Riders and supplementary benefits.
Increasing term insurance is useful in situations where the amount at risk is expected to increase
over time, perhaps due to inflation, investment returns or salary increases.Life insurance
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EXAMPLE
Connor is a business executive who is driven to succeed, and he expects his
income to continue to increase at about 10% per year. If he dies, he would like
to ensure that his wife receives a lump sum that equals ten times his annual
salary. Connor could buy increasing term insurance with an indexing factor of
10%, with an initial face amount equal to 10 times his current salary.
One of the benefits of increasing term insurance is that the coverage increases even if the life
insured experiences a decline in his health. The death benefit will continue to increase, up to the
cap specified by the policy, as long as the policyholder pays the increased premiums, and the
premium increases are known in advance.
2.4
Term insurance premiums
A premium on a term life insurance policy is the amount the policyholder pays to the insurance
company in exchange for the company’s promise to pay the death benefit if the life insured dies
during the term covered by the policy.
With the exception of increasing term insurance, term insurance premiums are typically level over
the term. The policyholder usually has the option of paying them monthly or annually, by cheque
or by pre-authorized direct payment from a bank account.
Provinces and territories charge a premium tax ranging from 2% to 4% on life insurance premiums
charged by licensed insurers. This premium tax is incorporated into the premiums charged to the
policyholder. For example, if a policyholder pays a premium of $102 in a province that has a 2%
premium tax, the insurance company must remit $2 of that premium to the provincial government.
