One of the most frequently misunderstood aspects of finance, but one that is very frequently requested, is the product of personal insurance. The difference between life, mortgage, and group insurance can be daunting. I hope that after this blog you will have a better grasp on what insurance may be best for your situation.
To understand insurance at all, one must grasp the role of insurance and the point in the insured's lifetime that it will be needed, if at all, and understand that personal insurance can be temporary or it can be permanent.
Temporary (Term) Insurance
This type of insurance covers the insured for a set amount of time(the Term),5, 10, 20 years and no longer, usually to an age maximum of 75-80. Insurance such as this is usefull for individuals that have a large debt that is expected to go away in the future such as a large mortgage or young children who will eventually outgrow their dependancy on parents.
The lower cost of term insurance is due to the fact that during the term of the individual it is unlikey that the insured will decease. It is therefore insurance against premature death. Having said that, most of us can recall an example of someone relatively close to us passing at a youthful age.
One thing that is vitally important about Term insurance is its conversion element. This means that if term insurance is in force at the time that an individual loses their health, the insured has the ability to change this product for permanent insurance without any medical explanation any time during the term.
To magnify the importance of this element of term insurance, let's take the simple fictional example of Noah, a 48 year old male, with two daughters aged 4 and 7 and a wife Christa with whom he shares a $210,000 mortgage. Noah has just learned that he has been diagnosed with cancer and has to prepare his family to possibly live on his wife's income alone. Can you see the value in creating a permanent insurance product, based on good health? Im sure Christa can.
Permanent Insurance(whole life/universal life/etc)
Simply,permanent insurance guarantees the insured a payout at death. Due to this, it is more expensive for the same amount of coverage as compared to a term insurance product. Insurance such as this is for individuals who foresee the cost of burial etc, taxes on property, income, or have a desire to leave behind an inheritance for a benficiary or to provide money for taxes payable on the succession of ownership of shares as part of their estate.
The premiums for insurance such as this can be designed to be payable for a set amount of time, or for the life of the policy. Over time, in both situations, the premium is reduced due to the time value erosion money purchasing power. Ie; $20 today may feel like only $10 dollars fifteen years from now and so on.
Mortgage Insurance
Mortgage insurance is a creditor insurance product that covers the Term of a mortgage. Becasue this is creditor insurance, it covers only the balance of your mortgage. This means that year after year of your term, you are paying the same premium for less coverage, due to your decling mortgage balance. Also, due to the fact that this is creditor insurance and not Term insurance, you have no ability to convert in the event of a loss of health. Case in point, in year 3 of a 5 year term, you have fallen ill to a mild stroke. Your mortgage balance is still $210,000. When you renew your mortgage, under good faith,you will have to forego mortgage insurance due to health reasons. You can try to get life insurance but will either be rated with a higher premium or declined altogether, once again due to health reasons.
Group Insurance (workplace, associations etc)
Group insurance is term insurance for individuals who will maintain their association with their workplace, assoc, chamber etc and is a "benefit" offered at a discount for being part of the group .
This is term death benefit insurance that covers the term of "while employed, associated, etc" up to an age maximum of usually 65.
The death benefit coverage is dictated by the employer or provider of your benefits package with options to select more coverage at an additional cost.
The conversion of this type of insurance for those leaving the group is dictated in the benefits manual for the company, assoc,etc.
Consider
1. Utilizing a combination of term and permanent insurance in order to keep premiums low while debts and responsibilities are large. Forego mortgage insurance for term insurance. The prices will be comparable if not cheaper, but the contract will be tied to your life rather that the lenders collateral. This will give you options in the event of "What if?" which is what term insurance is specifically designed for.
2.Select the minimum of Group insurance available from the group. All other insurance should be linked to your own name, health and circumstances from a licenced insurance agent.
3.For assistance with estate planning and succession planning of corporate shares etc, consider doing this at the earliest time due to the cost savings and time value erosion of your permanent insurance premiums. Plans can be tailored to suit multiple beneficiaries, corporate partners or the corporation itself and charities.
You can contact Shawn at contact@roweandmali.com or on the go at shawn.lariviere@rogers.balckberry.net for your insurance needs or use the Rowe & Mali Free online quote banner on this blog page.
Shawn Lariviere, FMA
is the Principal Advisor at Rowe & Mali Enhanced Wealth Services
roweandmali.com
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