Let’s break down the ins and outs of life insurance so you get comfortable talking about it.
Basically, what is life insurance?
Life insurance is a risk mitigation strategy. The risk is the financial effect your death will have on your dependents. There are two levels of life insurance. Term Insurance protects you for a set number of years. Permanent Insurance protects you for life.
How does term insurance work?
A term is selected. Common terms are 10, 20, and 30 years. Once the term ends, the policy premiums go up drastically. Do not confuse Term 100 with term insurance. Term 100 is a form of permanent insurance. Terms can be convertible (changed to permanent without evidence of insurability) or renewable (renewed without evidence of insurability).
How does permanent insurance work?
Permanent insurance does not expire.
Term 100 protects you until age 100. If you are still alive at 100, the policy either remains in force but is considered paid up, or the premiums are returned.
Whole life insurance invests part of your premium and builds a cash value within the policy that can be taken out by the policy holder, used to reduce the premium, or used to add value to the benefit.
Universal life insurance is similar to whole life, but it has more flexible options and the cash value, or cash surrender value (CSV), is added to the death benefit when it pays out. One can also borrow against the CSV. For both whole and universal life, the CSV grows tax-free, unless the policy holder put too much money into the policy for the sole intent of evading taxes.
What are the common terms used when discussing life insurance?
- Captive Agent: Can only sell the products of one company, such as an employee of Sun Life or Desjardins.
- Broker: Can access and sell the products of any life insurance company in Canada. Think of brokers as freelance life insurance professionals.
- Policy Holder: The one who purchases and pays for the policy.
- Life Insured: The person whose life is underwritten by the policy. The policy holder and the life insured can be the same or different people.
- Premium: The money the policy holder pays to keep the policy in force.
- Benefit: The money paid to the policy holder’s beneficiaries when a claim is made.
- Claim: A request for the policy to payout. All conditions of the policy must be satisfied for a claim to pay out.
- Free Look Period: To combat high-pressure sales, policyholders have a set amount of time to go over the policy and cancel it without penalty. After the free look period, if the policy holder wishes to cancel, he or she still can. In this case, the used portion of the premium is deducted and the rest is returned.
- Underwriter: The entity that approves/denies the application and provides the funds for the benefit. The agent or broker is not the same as the underwriter.
- Application: The paper or electronic form the applicant (person applying for the policy) must fill out.
- Application Process: The steps involved in getting the application ready for approval. This typically includes a medical test, further testing or questioning at the discretion of the underwriter, providing the first month’s premium, providing evidence or insurability, signing forms and providing documents of identification. The application process can be short of long, depending on the type of policy and the situation of the applicant.
- Standard Insurance: A policy that requires evidence of insurability. Best for healthy individuals. Most affordable type of policy.
- Simplified Issue: A policy that has no medical exam (aka no medical insurance) but has a medical questionnaire. Best for those with ailments that prevent the successful application of a standard policy, or for those that need insurance quickly or fear medical exams.
- Guaranteed Issue: A policy that has no medical exam and no medical questions. Best for those in ill health that would not otherwise qualify for standard or simplified insurance.
- Critical Illness Insurance (also referred to as cancer insurance): Pays a living benefit to help defray costs if the life insured contracts an illness listed in the policy. Typical illnesses covered are a heart attack, cancer, stroke and coronary bypass, but each policy differs. Some cover three or four illnesses; some cover 20. The main difference is that the life insured does not die for the policy to pay out.
- Accident and Sickness Insurance: Pays a living benefit to defray medical costs, such as prescription medication and dental care. It also has benefits for short and long term disability.
- Rider(s): An additional benefit added to the base policy that allows the policy holder to customize the policy. Typical riders include the return of premium, family riders (covers children), waiver or premium, etc.
- Exclusion: A clause in the policy from the underwriter that prevents the benefit from being paid out due to a specific cause. For example, someone with a history of BASE jumping may qualify for a standard policy, but it may have an exclusion to prevent payout if the life insured died in a BASE jumping accident.
- Joint First/Last To Die: A policy that insures two life spans, but pays out if the first life, or the last life, passes. For example, a husband and wife may want a joint-first-to-die policy to ensure their mortgage is paid off upon the death of the first spouse, but a couple that needs to satisfy capital gains tax after a spousal rollover of assets may prefer a joint-last-to-die policy that pays out when the surviving spouse passes away.
While this is by no means an exhaustive list of all of the terms or definitions, it will help you better understand the basics of life insurance. As you can see, life insurance is nothing to fear! In fact, the fear should be prevalent for those that do not have the peace of mind life insurance offers.
The industry is tightly regulated to prevent fraud and hard sales, and thanks to technology, such as screen share software to review and sign applications, applicants don’t even need to book office appointments or have a broker or agent come to their home.
It’s never been easier to get life insurance, and the time to do so is now.
To learn more about life insurance and buy online, please call us direct at 1.888.498.5288.