People hate two things: discussing their own mortality and buying something intangible that provides a benefit they will never experience. I am no different and found a strong dislike when reviewing my own personal life insurance coverage. Even being in the life insurance industry, I could have been quicker implementing this essential coverage.
So strap in – welcome to the best self-proclaimed life insurance blog you’ll read today (we hope)!
What is Life Insurance and How Does it Work?
Of all types of insurance, life insurance is the easiest to describe. When you die, the life insurance company pays money to the people you have designated as your beneficiaries. There are no requirements or strings attached to the money, and it is (generally) tax-free to spend as you wish!
The life insurance company calculates your mortality risk using data of similar people (age, health, lifestyle, etc.), and that “risk” is how your premiums are calculated.
Common Types of Life Insurance
Below, we break out the difference between your coverage at work, mortgage insurance, and individual insurance.
1.) Coverage Through Work
If you have Group Health Benefits through work, thereis usually a life insurance component. Frequently, we see a flat rate such as $25,000 - $100,000, or 2x your salary up to a limit. This type of insurance does not require underwriting for each individual. This is because the risk is spread across a larger group of individuals.
Will your benefit payout be reduced by taxes?
This is one of the very few situations where a life insurance payout could be taxable. There are two ways to verify your life insurance benefit will not be taxable when paid to your beneficiaries:
- Your paycheque shows a deduction for life insurance premiums.
- You are issued a T4A at tax time. Box 119 is filled in with a dollar amount.
Who controls the coverage?
Your coverage is not owned or controlled by you; it iscontrolled by your employer. As a result, your employer can increase or decrease your coverage at any time.
Can I Take the Coverage with Me?
This coverage is not portable. If you change employers, the current coverage at your current rate will not be accessible. Depending on the company facilitating your coverage, they may offer a policy that allows you to maintain some form of coverage without underwriting. These plans offer limited coverage and are expensive. This is because almost everyone who chooses to continue their coverage would not qualify for traditional personal coverage, making the entire class of people insured a higher risk.
Coverage through your employer has a place in your financial plan. The key is understanding your actual overage and needs. An example is if your current requirement is only to pay for a funeral and final expenses.
2.) Mortgage Insurance
Mortgage/creditor life insurance (not to be confused withthe mortgage default insurance offered by CMHC) is generally offered when finalizing your mortgage. The mortgage broker or bank advisor will undoubtedly ask you if you want mortgage insurance or creditor insurance. All you have to do is answer 3-5 medical questions, and you are covered with a combination of life, critical illness, disability insurance (varies by provider).
In the event of death, your mortgage obligation is fully paid off. The life insurance benefit goes straight from the insurance company to your mortgage lender.
When Does Underwriting Happen?
Underwriting happens at the time of a claim. This means after you file a claim, the insurance company looks at your application and verifies with your doctors that everything on the application was truthful. The unfortunate part is there are many cases where the benefits do not payout for various reasons. The CBC show Marketplace featured a story about this in 2008 (link here).
Can I Take My Coverage With Me?
For most creditor insurance products, coverage is explicitly tied to the lender. That means if you change your mortgage lender at the end of the term, you will need to reapply for coverage with the new lender. If you are no longer in good health, affordable coverage may be hard to come by.
Mortgage Insurance Premiums
Premiums (amount paid) for your life insurance coverage remain consistent for the duration of your mortgage term. As you lower your mortgage payments (and life coverage), your premiums stay the same.
3.) Personal Life Insurance
This is your traditional stand-alone life insurance policy. There are primarily two types of personal life insurance policies, term and permanent. Both term and permanent require upfront underwriting.
Underwriting for Both Term and Permanent Insurance
Underwriting for personal life insurance policies (both term and permanent) is completed before the coverage is issued. It ranges by the company but can include a questionnaire, vitals, urine or blood specimens. Since the pandemic, most life insurance companies have decreased specimen requirements.
Underwriting may sound like the boogeyman, but it is beneficial when completed before coverage is issued as it keeps premiums affordable.
What Affects the Premium Amounts?
Life insurance companies determine your risk based on many different factors such as age, smoking, health history, and lifestyle. This stage is called underwriting.
The annual amount you pay into your policy (called the premium) is reflective of that risk. We are a big fan of visualizing “drier” concepts. Take a look below at what affects your life insurance premiums.
Term Insurance
Term insurance coverage is temporary and is the equivalent of “renting” insurance. When buying a policy, the term will have a specific coverage duration (ex. 10, 20, 30 years). Since the term coverage is temporary, term policies are lower in cost when compared to permanent insurance, which is guaranteed to payout. The coverage and premiums are guaranteed not to change for the term’s duration.
Term policies are flexible. You can choose to cancel or reduce coverage before the end of the term. Most term policies allow you to convert some or all of your term coverage into permanent coverage without medical underwriting (this is an excellent benefit later in life). This type of insurance is most popular with young families, mortgages, or debt.
Permanent Insurance
If term insurance were the equivalent of renting, permanent insurance would be owning. The purpose of permanent insurance is to provide coverage for permanent (life-long) needs. These can be final expenses (funeral & probate), bequeaths, succession planning for corporations, etc.
Initially, premiums for permanent insurance cost more than term insurance due to its guarantee to payout in the future. Permanent insurance policies also can offer different premium payment structures:
- Lump-sum: one-time payment
- Life pay: same premium for the length of your life
- Payment for a set number of years: Lifetime coverage, but you only pay for a set time (ex. 10, 15, 20 years). The shorter the years, the higher the payment.
Summary (TL;DR)
Understanding your current coverage and what is available is critical. Years ago, somebody told me, “everybody dies, but not everybody gets old,” and it stuck. This saying was the driver that helped me put my own personal life insurance coverage in place (rather than keep putting it off).
We help our clients figure out their current coverage, how it works and determine if they are over or underinsured.
Click here to book a complimentary call with us to review your coverage today!
