Choosing Life Insurance

Life Insurance. It’s one of those things we know we need, but often have no idea where to start. Big changes to our lives and the lives of those around us are often what motivates people to search for life insurance.

With so many companies, options, advisors, questionnaires, and terms like ‘term’ versus ‘permanent’… it all becomes so overwhelming that many of us stop before we even begin. Even experts in the space often do not agree on the best path forward for some clients. 

So how do you even start? 

What is the best life insurance that a person can choose for themselves, and for their family?

We here at Emma understand that Life Insurance can be complex, so we made this guide as thorough and accessible as we can.

What is Life Insurance anyway?

Life Insurance is an instrument that has been around for thousands of years, since the Roman Empire. Burial clubs would cover the cost of member’s funeral expenses and financially supported survivors. The need to cover the loss of something as precious as life has always been on our minds.

The modern explanation of life insurance is the financial transfer of catastrophic risk from an individual to an insurance company. Much the same way that home insurance and automotive insurance exist, life insurance exists as a means to cover the often-unaffordable loss our family or even business has to bear when we pass. This is the key reason many people buy life insurance.

What Makes an Insurance Contract valid?

One question people tend to ask is “how do I know the insurance company is going to pay?”. Excellent question. The insurance policy you enter into forms part of a contract. To ensure that the contract you enter into is valid, we need to look at what forms an insurance contract. There are five elements:

Agreement and Awareness (Offer and Acceptance)

This is where the contract begins: You (the proposed policyholder) apply for life insurance, which is your “offer”. The insurance company will give you the terms of the agreement, and the cost. Once you agree to the terms and cost, this becomes the “acceptance”. It goes without saying, but both parties need to be aware of the components and terms of the agreement.

Consideration

Consideration is about what each party gives and gets in the deal. In this case, money is consideration. You give funds (premiums) regularly to the insurance company. In return, the insurer promises a determined amount they will remit in the event of death (otherwise known as “a loss”). Consideration is simply you giving money, and getting a product or service in return.

Legal capacity

Everyone involved needs to be legally competent to enter into a contract. This means the person buying life insurance needs to be of adult age and mentally capable of entering into a contract. As well, the company selling life insurance must have the legal right to create the policy in this jurisdiction, and the broker or agent selling it needs to be licensed. This ensures everyone that forms part of the contract is eligible.

Legal Purpose

Since the beginning of insurance, there have been people who tried to “game the system”. As a result, the framework for insurance is rooted in “legal purpose”. Basically, you cannot have an insurance policy for something illegal. The purpose of the insurance must be to provide protection against real risks, for which you have an insurable interest. 

Ask yourself

The first step in choosing the right life insurance is to get a sense of what exactly is motivating you to look at life insurance right now. Has there been a loss recently in your circle? Are you welcoming a newborn into your family? Did you just purchase a home and are nervous about the potential of facing that mortgage payment alone? Are you trying to leave a legacy for your family? Are you young and wanting to keep your future premiums low?

All very important questions. The answer to those should guide your next step.

Do the math

There are a number of important factors to consider when coming up with “how much” life insurance you need. The following details will affect your need for insurance:

• Your age
• Current Salary
• The number and age of children
• Childcare and education expenses
• Mortgage amount and amortization
• Debt
• Burial costs
• Vocational Training for your surviving partner (if needed)
• How much savings you have
• Current insurance policies
• Legacy planning (leaving money for your adult children tax-effectively)
• Charitable giving

Working with a licensed advisor, they would be able to analyze all these unique needs to determine the exact amount of coverage necessary for you, and possibly your partner, for a specific period of time.

Consider Loved Ones

Of course, the reason you are buying insurance is to make sure that the ones you leave behind are looked after. That life for them yesterday continues if we don’t see tomorrow. One important thing to consider is that your partner is also contributing to the household, and their loss can be equally as impactful as yours. It would be important to consider your insurance needs together.

How’s your health?

Another factor many people tend to overlook is the impact their health will have on the cost of insurance. Some important topics that affect the cost, which insurers universally want to know about are:

• Your Age
• Smoking Status
• Diagnosis, treatment, or investigation of illness
• Lifestyle questions
• Family History
• Other factors depending on the amount of insurance you seek, as well as the type of insurance product.

Any of the above will affect your insurability in different ways. You may receive a rating, meaning an increase in the amount of premium that may be charged for a standard applicant. You may have an exclusion (ex. No payment in the event of a specific illness), or you may be declined or postponed. All of these outcomes will form part of your insurance file for future applications.

Non Medical

Non-medical insurance is an insurance policy offered by certain companies that promise no medical exams and relaxed medical questionnaires. 

While the premiums are slightly higher than standard insurers, they are often more competitive than someone who would otherwise get a rating with another company.  This is usually a very good option for people who have had health or lifestyle issues that affect their ability to get insurance, or people who want to avoid giving vitals or fluids. 

Premiums

The cost of insurance that you pay on a monthly (or annual) basis are called “premiums”. These premiums form part of the ‘consideration’ we discussed earlier. Provided you pay the premiums on time per the terms of your insurance contract, and the contract is in force - you are covered. Premiums can be for a fixed period of time (a term), or for the life of the insured (permanent). 

Be careful regarding the terms of your contract. Premiums may increase for example, if a term policy renews. This may encourage people to look at different term or permanent coverages.

Term? Permanent?

Yes! It’s very important to know the difference between the two. When an advisor goes through your needs analysis, the details you provide will help you narrow down the best option.

Term Life Insurance

Most of us who drive a car or own a home are familiar with the concept of insurance for these. You pay a fixed amount every month or year, and while you pay, your house and car are covered in the event of a loss (your car is totaled, the house burns down). The cost of replacing these is substantial, and most of us would face financial ruin. As a result, we pay a fraction of the cost of these losses for insurance.

Term life insurance works the same way. You enter into a fixed-term contract (usually 10, 20, 30 years, but some insurance companies have different terms available) that is set to expire. Since the likelihood of passing away within a fixed-term is often very low, insurance companies charge a much lower premium that reflects this. You would be responsible for paying these premiums for as long as the term is set. Even if you face a serious illness or become uninsurable during your term, you are still covered under the same contract terms.

At the end of the term, you often have four choices (depending on the policy terms and your situation):

• Let the policy lapse: you are no longer covered and owe no more premiums
• Renew the policy: without medical evidence, your policy renews for a fixed period of time. If you have faced serious illness during your term, this may be the only way for you to continue to have life insurance. The premiums often jump substantially.
• Reapply: If your health is good, you can try to re-apply for lower rates than a renewal. You would have to provide evidence of insurability.
• Convert to permanent: This will allow you to, depending on the contract, take some-or-all of your term insurance coverage and make it permanent. There are different options available here as well, but most of them involve no additional medical questions. This is crucial in your later years when your health and insurability is at greater risk. More on this below.

Permanent Life Insurance

Whether you have an ongoing, smaller need for insurance later on, or if you want to find a tax-efficient way to leave wealth to your surviving children, you will want to consider this. Permanent life insurance is exactly how it sounds: a permanent policy that is in force and will pay at death, no matter when that is. 

Unfortunately, since the insurance company is guaranteed to pay, the premiums reflect this increase in risk to the insurer. While the same premium in some cases may buy over $1,000,000 of term coverage for 20 years, the same premium will only buy a fraction of this amount, on a permanent basis. And within permanent life insurance, there are several types.

Whole Life

Whole life insurance is cleverly named because it’s there for exactly that long: your whole life. The most attractive option for those who purchase this type of life insurance policy is that the death benefit can increase over time with the same amount of premiums. You may also get other cash options because this kind of policy participates in the profit of the insurance company by way of a dividend. This dividend can be used to increase the death benefit, reduce premium costs, or other options depending on the contract. 

This is an innovative way to do longer-term planning and provide funds for yourself and your family in a more tax-efficient way. The challenge is that not all dividends are guaranteed, although your death benefit and certain cash values illustrated may be.

Only a licensed advisor, like one at Emma Life Insurance, can help you understand the key benefits of this type of plan.

Universal Life

Similar to Whole Life, universal life offers slightly different features that allow you greater flexibility with your death benefit, premiums and investment options. The premiums you pay contribute to a small fund that you can then invest more flexibly and see your policy grow well. 

The flexibility comes at two big disadvantages: you have to monitor your policy performance to ensure your premium payments are stable, and interest rates may have severe consequences. A Forbes article explains that falling interest rates of the 1980s saw many policies years later lapse due to falling performance of their universal life policies. 

Term Life (T100) 

Similar to term insurance, this policy is a simpler permanent coverage that typically has premiums due to age 100. If you die, the specified coverage will be paid to your beneficiaries. These policies typically do not have cash values, but can also be the cheapest in terms of premium.

Working with a qualified and experienced advisor will help determine what the right product is for your intended needs.

Choosing an advisor

Insurance has been long-considered a business of trust. It is important for you to do business with someone who takes on the responsibility of:

• Understanding your needs first
• Understands why you are considering insurance
• Has the product knowledge to provide you the right solution for your situation
• Reviews their recommendations and answers your questions to your satisfaction

Choosing an insurer

When choosing an insurer, we believe that three things are critical in putting your trust forward:

• Company reputation for paying claims
• The cost of the premium versus the benefit received
• Their financial strength and longevity to pay the claims on their books

You need to make sure that the company you’re providing premiums to has the ability to settle the claims as promised, and does it as painlessly as possible. You also want to be sure that a benefit is available to your loved ones for the best possible price, when the unforeseen happens.

An experienced advisor carefully examines the service and company strength of the insurer they recommend, in order to assure you that everything will go as smoothly as possible, and as planned.

Choosing Emma

With solid technology and decades of experience behind us at Emma, we constantly strive to provide an exceptional, digital experience for our clients.

With our team of advisors who are able to offer both Emma Life Insurance as well as brokers for the entire Canadian Insurance Market, we will diligently work to make your search for life insurance with us easy to do, providing you with clear explanations and leveraging our experience to find the right solution for the right price - and protect what matters most to you.

We look forward to serving you!