Life insurance enables policyholders to replace the income of a lost loved one in the event of their death. It is a critical safety net to ensure that the surviving family members can maintain their standard of living. Navigating the intricacies of purchasing and maximizing life insurance is complicated, so we have written this article to break down the basics about life insurance as well as some of the best ways to use it.
Term Life Vs Universal Life
First, we need to review the difference between the two major forms of life insurance: term life and universal life. Term life insurance provides basic coverage for a specific amount of time. Its main benefit is that it is cost-effective for a short period of time. Coverage is generally available for 5, 10, 15, or 20 years, or to age 100. Premiums stay the same for the term but term life insurance’s main downfall is cost increases as one ages, since new policies must be purchased after the previous one expires. Therefore, with time, repurchased life insurance(s) may involve paying much higher premiums. Furthermore, there is the risk that by waiting, one’s health may worsen resulting in trouble getting approved. As term coverage runs out, there is the possibility that one has purchased the insurance without collecting a benefit from it.
Universal life insurance lasts for the policyholder’s lifetime and is quite flexible in how it operates in terms of insurance and investment options. Premiums stay the same so long as the policy remains in effect. These premiums build up cash and/or dividends. Universal life is more expensive than term life, but it also offers additional options and coverage.
What applies for both forms of life insurance is the value of purchasing it as early as possible. Whether term or life, the younger a policyholder is, the cheaper their premiums generally are.
Important Questions to Ask
A policyholder’s life insurance portfolio can be as individual as our situations. Some important questions for finding the best setup are: Does the policy meet my current needs? Will the policy provide flexibility for my future needs? What does the policy cost now? What are the policy’s expected lifetime costs? These are all questions that we ask our clients as they consider life insurance options.
Save the Cash Value
Universal life insurances includes an accumulation account, meaning that part of your premium payment is held in an account to earn interest and/or dividends. When the policy pays out, the full amount in the cash account is added to the benefit amount. This means that beneficiaries get the policy’s face value plus the cash.
Buying Several Policies
There are several strategies that use multiple policies—as opposed to one large one—to achieve higher payouts with lower premiums. The most popular strategy is to take out a universal life insurance policy and a term policy. Term life insurance has an expiration date and therefore costs less when taking out large policies. This is because the insurance company’s risk is lower due to the policy lasting a limited number of years. Therefore, they offer better rates. This strategy enables policyholders to insure themselves during the years when there is a mortgage to pay, children to provide for, etc. with a large term life policy, and once it runs out and those high risk years pass, the universal policy is still there to protect them. The result is lifelong coverage with a larger payout during the years the policyholder needs it most.
Do Not Cancel or Let Policies Lapse
Unless absolutely required, never cancel life insurance or allow coverage to lapse. Taking out a future policy will almost always mean higher premiums and doing this often requires a new medical exam. The best way to add more coverage is not to cancel existing policies and purchasing new ones but instead to add onto the existing life insurance.
Using Life Insurance to Maximize Wealth
Once a family has minimal debt and grown children, one might wonder what good life insurance does them. The good news is that life insurance can be used as a way to maximize wealth.
First of all, life insurance is tax efficient because the proceeds from it are paid out tax free. And remember the accumulation fund within universal life policies we mentioned earlier? It can be used to offset future premiums, allowing them to be offset with pre-tax dollars instead of after tax dollars.
Next, life insurance is a risk free asset. Unlike a portfolio of stocks or funds, life insurance policies are guaranteed and therefore lack the downside risk. However, the downside to this is that the money contributed to an investment portfolio can be accessed while the owner is alive, but that is not the case for the face amount on a life insurance policy.
Life insurance is a critical component of our holistic approach to a balanced portfolio. If you or someone you know is interested in exploring life insurance options, please call us at 514-934-0586 (Montreal), 403-228-2378 (Calgary), or email us at inforequest@rothenberg.ca.