There are two main types of life insurance policies, each
for different purposes. Term insurance is strictly for short
term needs. Permanent insurance provides coverage for life
and has cash values; it is still available in the traditional
whole life form or in the newer form fast growing in popularity
called universal life.
Term insurance is usually recommended if you need financial
protection for a specific period of time, whether it's one,
five, 10 or even 20 years. Term insurance helps cover needs
that will disappear over time, such as a mortgage or education
expenses. It also is recommended for families that need
a large amount of life insurance protection and are on a
limited budget, since term insurance premiums are generally
less expensive.
Most policies can be renewed up to a certain age - usually
age 75. Premiums increase for each renewal period. It pays
a death benefit to your beneficiary only if you die while
the policy is in force. There are no cash values if you
surrender the policy before you die. At the end of the policy
term, protection ends unless the policy is renewed. Your
beneficiary will not have to pay income taxes on the death
benefit.
Whole or ordinary life provides guaranteed level premiums
and guaranteed insurance coverage for life. The level premium
is higher than initial term insurance premiums, but this
higher premium contributes toward a significant tax-deferred
savings component, which is called the policy cash surrender
value. The premiums and death benefit usually remain constant
over the life of the policy.
Whole life policies can be bought on a "participating"
or "non-participating" basis. Participating (par)
policies share in a portion of the profits that the life
company makes on its block of par business. The amount allocated
to each individual par policy is called a dividend and can
be paid out under different options as selected by the policyholder.
The size of the dividend depends on the insurer's investment,
mortality, and expense experience. Dividends are not guaranteed.
Non-par policies do not share in profits and therefore do
not receive dividends.
The popularity of universal life has increased as consumer
concerns about "choosing" the right life insurance
policy have increased. Traditional "permanent"
life insurance policies do not offer clear-cut disclosure
of policy costs such as administration charges, the premiums
applicable to the life insurance coverage itself, and the
portion of the premium that is invested.
Although each insurance company selling universal life
has its own description, there are certain features the
policies have in common. It is an insurance contract that
combines term insurance with an investment element. The
insurance costs, referred to as mortality charges, are clearly
defined in the contract. They are either level throughout
the contract or increase every year, as the insured gets
older. The amount of premium in excess of the mortality
and other charges, up to a certain maximum, is invested
by the insured in one or a combination of investment options
that are offered by the insurance company. Earnings are
tax-free if left in the policy while living, and are paid
out tax-free at death.
Investment options that link the performance of the "investment"
part of the policies to stock or bond indices have become
very popular. Most life companies offer a series of options
that allow the policyholder to link all or part of the "investments"
to the growth of a Canadian index (such as the TSE 100),
an American index (such as the S&P 500) and a world
index (such as the Morgan Stanley world index). In addition,
growth can usually be linked a Short or Mid Term Bond Index
and most companies continue to offer a selection of one
or more guaranteed investment certificate (GIC) type deposits.
It is important to understand that a universal life policyholder
with an equity option does not actually acquire shares in
a mutual fund or segregated fund. The cash value will vary
based on the comparative performance of the index or in
some cases mutual funds to which the money in the "side
fund" is linked.
An important feature of all universal life policies is
the flexibility of premiums and coverage. Policyholders
can adjust the amount of insurance and investment portion
on a regular basis. It means that the plan can be adjusted
to suit current and future circumstances of the insured.
This makes it attractive for estate planning, "estate
friendly investing", business continuation and charitable
giving purposes.
