A. Term Insurance

Term Life Insurance is the simplest form of life insurance. It provides a pure death benefit. The policy will cover the insured for a specified period of time. It generally comes in 5, 10, 15, and 20 year terms. The term policy contains:

Guaranteed Renewable Privilege - allows the insured to renew the policy without having to prove insurability, hence the name “term” insurance. This means that the premiums are guaranteed for that period of time and they will automatically renew at a higher rate for the next term period. For example, a 10 year term policy has guaranteed rates for the first ten years and then you can renew it for another ten years without a medical at a set rate contained in the policy. Do not renew it if your health is good as the renewal rates can be 25% to 100% more than the premiums if you shop around for a new policy. The assumption is that you only renew if you are too sick to get a new policy.

Conversion Privilege - guarantees the insured the right to convert from the term policy to a whole life policy without proof of insurability; however you should expect to pay higher premiums.

For individuals age 40 or less, a term policy will almost always be less costly than a Cash Value Insurance. Although term policies do not build cash values, many are convertible to Cash Value Insurance policies without evidence of insurability. Thus, a term convertible policy may be a good option for someone who is under 40.

Why purchase a Term policy?
Short term needs: Mortgage Insurance, Personal or Business Loans.
Not enough money for insurance
No trust in insurance companies and/or Life Insurance in general.
Start small and convert or buy permanent insurance later.

Term to 100 Insurance is frequently used when all you want is a basic permanent insurance policy that you pay for until you die and then the beneficiary collects the money. It is usually the cheapest solution for this need. Buyers are usually over 60.

Conclusion: Term Insurance is like renting. The moment you cancel the policy, you leave with nothing.

B. Cash Value Insurance

Whole Life Insurance (permanent insurance) is designed to provide protection for the entire life of the insured as long as the premiums are paid. This is the traditional life insurance policy. It provides a death benefit, has a cash value build-up, and sometimes pays dividends. You do not need to renew a whole life policy. As long as you pay your premiums, you will have coverage, usually until your death. The premium for a whole life policy remains the same for the amount of time you own the policy; the premium is "level" in insurance parlance. Thus, when you are younger, the premium you pay for whole life will be greater than what you would pay for term, but when you are older, the premium will be much less than a term premium. Part of each premium goes into the cash value of your policy. Your cash value, which is actually an investment, is guaranteed to grow at a fixed rate. You do not have to pay current income taxes on the growth in the cash value—it is tax-deferred.

TIP: You can borrow against your cash value. If you die with an outstanding loan amount, the loan amount, plus interest, will be subtracted from your death benefit.

Dividend-paying whole life policies—termed "participating" policies—are usually offered by mutual life insurance companies. Mutual life insurance companies are generally owned by policyholders, while other insurance companies are owned by shareholders. The dividends are refunds of insurance premiums that exceed a certain level. They are paid when the insurance company does well during a quarter or a year. Of course, premiums for participating policies are usually higher than those paid for non-participating policies.

Universal Life

Universal life, also known as "flexible premium adjustable life," is similar to whole life, but offers more flexibility in terms of payment of premiums and cash value growth. With a universal life policy, your monthly premium amount is first credited to your cash value. The company then deducts the cost of your death benefit and the expenses of the policy. These costs are about equal to what it would cost to buy term coverage. As with whole life, your cash value grows at a fixed minimum rate of interest. The growth of the cash value is tax-sheltered, and you can borrow against it or make partial withdrawals. Universal life insurance policies were designed to provide an answer to the advice that you should "buy term insurance and invest the difference".

In a Universal Life Insurance Policy, the mortality charges are disclosed and, I recommend that they should be level (they do not increase as you get older). The administration charges are also identified and frequently guaranteed not to change for the life of the policy. They are generally in the $50 to $135 per annum range.

It is the investment options inside a Universal Life Policy that have grown dramatically over the past few years. While some of the older policies did not disclose how the returns were calculated, the newer ones are offering a list of investment options that have similarities to mutual funds. In fact, some are designed to provide returns that mirror well known mutual funds and they are managed by mutual funds managers. Examples include Standard and Poor Index Accounts, Canadian Index Accounts, Canadian and American Equity Index Accounts, Bond Index Accounts, and 1, 5, and 10 Year GIC Type Accounts.

Why purchase a permanent policy?

To ensure you spouse will have sufficient money to retire even if you spend more than anticipated during your retirement - this was my reason for purchasing a permanent policy “I wanted to ensure that my wife has sufficient cash when I die to enjoy her retirement regardless of what we spend in retirement”

To guarantee that you will leave some money to children – it goes to them tax free and probate free if the beneficiaries are set up properly.

To leave money to a charity. A major use is to provide money to pay capital gains or estate taxes so that your beneficiaries can keep the assets or property on your death and not have to sell some to pay the taxes. This does not apply to your spouse in most cases as assets flow to them tax free.

They can also be set up so that premiums are only paid for a set number of years – usually 1 to 20 years after which the policy is fully paid up or there are sufficient funds in it to pay the premiums for life.

The funds are "creditor proofed" if the policy is set up properly. Creditors can not get at the funds inside this policy, which is important for many business owners and others who are concerned about lawsuits.

If the policy is set up properly, the entire investment account plus the face value of the insurance policy goes to the beneficiary tax-free on death of the insured. There are not even any Probate Fees. The same applies to a whole life policy but the cash value may or may not be in addition to the face value depending on the type of Whole Life Policy.

It is my experience that Universal Life Insurance Policies are being used for estate planning as much as they are for meeting traditional insurance needs. There are numerous tax saving and estate planning strategies that utilize this type of insurance.

In Conclusion: Permanent Insurance is like Owning. You have tax advantages even alive.

I hope that this short description will help you make informative decision about what type of insurance should you have.

For more information please don’t hesitate to call me at 416-824-3779.

Kind regards,

Gerry Avram