The basics of life insurance - what you need and what to consider
You’re probably familiar with the basic concept of life insurance: It’s an insurance contract where, in exchange for the premiums paid, the life insurance company pays a tax-free lump sum benefit to your designated beneficiary upon your death. But there’s much more to it than that.
Life insurance can be useful for both you and your business, and it can be tailored to meet your specific needs. Life insurance can also be used as a tool to help you achieve your financial planning goals. In fact, few financial plans are complete without some form of life insurance.
The two types of life insurance
Term insurance and permanent insurance
Did you know there’s more than one type of life insurance? The two main types are (Bold) term insurance and permanent insurance.
- Term is active for a specified term, such as 10 or 20 years, as long as you keep paying the premiums, which remain the same throughout the term. Depending on the type of policy you choose, the insurance may terminate, renew or be converted to a permanent policy at the end of the term.
- Permanent insurance lasts until you die, and the coverage can’t be cancelled or reduced by the insurance company as long as the premiums are being paid.
The basics of term life insurance
Renewable term life insurance, such as that offered by Manulife, automatically renews at the end of the term for the same term but with higher premiums. If you keep the same amount of coverage or lower that coverage, you won’t have to answer a medical questionnaire and your new premiums for the term will be based on your age at the time of renewal.
You have the option, instead of accepting the automatic renewal, of purchasing new term insurance, converting to permanent insurance or ending the policy. The advantage of the automatic renewal is that you’re guaranteed to be insured for the same term again even if your health has changed since the original policy was underwritten. All else being equal, if you’re still in good health, it’s likely that your premiums will be lower if you apply for a new policy.
Your policy will specify a limit to the number of times you can renew, which is usually based on attaining a certain age. If your policy gives you the option to convert to a permanent policy, underwriting won’t be required unless you increase your coverage.
Why choose term life insurance?
You can use term life insurance for income replacement, mortgage and debt protection and business continuity. Some policies, such as Manulife CoverMe™, offer cash advances of a portion of the death benefit if you receive a terminal illness diagnosis with less than 12 months to live.
Income replacement insurance
Typically, you’ll buy term life insurance to replace your income when it would be most needed, such as when your children are in school or you’re paying a mortgage. If, for instance, 10 years from now your kids will be finished school and your mortgage will be paid off, then a 10-year term might make sense for you. If you find that you still need coverage at the end of the 10 years, you can apply for a new policy, renew the current policy or convert it to permanent insurance.
Tailor your policy to suit your needs
If you want to cover additional members of your family, then you might want to consider a family policy. Family policies, such as Manulife Family Term™, allow you to insure one or more people under the same policy.
To make sure you get the most from your insurance and the exact coverage you need, some insurance policies offer add-ons, known as riders. These can include options such as:
- adding protection in case you’re seriously injured,
- guaranteeing your future eligibility for life insurance,
- guaranteeing your children can get life insurance in the future
- skipping your premium payments if you become disabled.
The basics of permanent life insurance
The three types of permanent insurance are Term-100, whole life and universal life.
Term-100 protects you, with the same premiums and death benefit, until you turn 100. Depending on the type of policy, when you turn 100 you’ll either receive the death benefit and your policy will no longer be active or your premiums will end but your policy will remain in effect.
Whole life insurance is permanent insurance that gives you:
- guaranteed protection for life
- guaranteed cash value that grows over time
- premiums that remain the same for the life of your policy
Whole life insurance can be participating or non-participating. Participating whole life policies receive dividends that you can take as cash or use to buy more insurance coverage.
Whole life policies build up a cash value over time. This is a portion of the policy that, subject to certain conditions, you can withdraw or use as collateral for a loan. A portion of the accumulated cash value may also be paid to you if you cancel the policy.
Universal life insurance is permanent life insurance that gives you the opportunity for tax-advantaged investment. You don’t receive dividends like you do with a participating life policy but you have a tax-advantaged investment account attached to your policy. As the value of this account grows, you can take withdrawals from it, use it to pay your premiums or use it as collateral for a loan. Any remaining value in your investment account will be paid out with the death benefit.
Universal life gives you more flexibility than whole life, including some choice of investments, the option to change the amount of insurance and the ability to adjust the amount and frequency of your premiums.
Financial planning with permanent life
Some of the ways you might be able to use permanent life insurance as a part of your financial plan are to:
- build tax-advantaged wealth
- supplement your retirement income
- provide collateral security for a loan
- preserve your estate
- transfer wealth to the next generation
You can even use life insurance to transfer accumulated wealth to the next generation while you’re still alive, because under certain conditions ownership of a life insurance policy can be transferred without triggering taxes.
Succession planning can be a difficult process for a family, but having the right insurance can help. If you’re a business owner passing on the business to family members who are active in the business, you can use life insurance to provide a lump sum to the family members who are not inheriting a piece of the business to make for a fair inheritance.
Business uses for life insurance
You can also use life insurance for your business, including key person insurance, covering a business owner who has personally guaranteed business loans, helping surviving partners buy out the deceased’s shares to ensure a smooth succession, covering tax liabilities that might be incurred upon the death of an owner or partner and as a benefit to attract higher quality employees.
What can affect your premiums?
Life insurance premiums are based on many factors such as the type of policy and any additional features or coverages that may be included with the policy. Premiums are usually higher for longer-term insurance and for more coverage. And while each application is considered separately, your premiums will tend to be lower if you’re young, healthy, don’t smoke, don’t have a high-risk occupation and don’t participate in high-risk hobbies.
When should you get life insurance?
Only you can decide if the time is right for you to buy life insurance. The timing will depend on your life stage, your financial planning goals and your budget. Many people start thinking about life insurance when they get married or when their first child is on the way. But some people buy it before they need it as part of a financial planning strategy or because the premiums are lower when you’re younger.
How much life insurance do you need?
Determining the amount of insurance you need can seem complicated, but it doesn’t have to be. Manulife has online calculators that can help you choose the amount of insurance that’s right for you.
These calculations take into consideration:
- the amount and period over which your income will need to be replaced
- your obligations such as mortgages and other debts
- your expected future expenses such as a child’s tuition
Keep in mind that final expenses such as a funeral can cost thousands of dollars.
You should also look at assets that might be available to fund these expenses, as well as your spouse’s income. When you’ve arrived at the optimal amount, then you’ll need to balance this with what you can afford.
What if you need to change your coverage?
Life is full of changes and some of these may mean you want to change the amount of life insurance coverage you have. Some policies will allow you to request an increase or decrease in the amount of coverage (subject to conditions outlined in the policy). Where an increase is allowed, you’ll need to provide evidence of insurability (documented proof of good health) for everyone covered under the policy, and the increase may be a separate additional insurance coverage. You can also increase your coverage by taking out another policy.
Can you have multiple policies?
Speaking of taking out another policy, did you know you can have multiple insurance policies? For instance, you can have a policy to supplement the coverage you receive through the group plan provided by your employer. Insurers don’t necessarily limit the number of policies you have, but when they’re determining whether to issue more coverage, they’ll take into account how much total insurance you’ll have and whether it’s reasonable given your circumstances. If you don’t earn much money and you have few financial obligations, you’re unlikely to need millions of dollars in life insurance.
It’s never been easier to apply for life insurance
If you’re like a lot of people, you’re apprehensive about answering a medical questionnaire and undergoing a medical exam when you apply for insurance. After all, who likes getting blood drawn? But rest easy. Some insurers, like Manulife, have made changes to underwriting requirements and limits that are making this process much easier — and there are an increasing number of policies that are issued without the need for fluids to be taken. For example, CoverMe™ Guaranteed Issue Life Insurance requires no medical questions at the time of application and CoverMe™ Easy Issue Life Insurance only requires that you answer two medical questions when you apply.
And it has never been easier for you to apply for insurance. Manulife has been at the forefront of driving innovation in how people apply for life insurance. We offer eApplication and eSignature to reduce errors, save time and reduce the amount of back-and-forth between you and your agent. When the policy is ready, it can be delivered and signed for electronically, and our online eForms service makes it easy for you to make changes to your existing coverage.
You can request a quote or apply for CoverMe™ life insurance products online at coverme.com or by phone at 1-877-268-3763.