The concept of insurance goes back to the days of the Romans, but it wasn’t formalized until the 18th century. Essentially, it’s a means of spreading financial risk among a large number of people who pay into a fund or pool. In this way, the cost is minimized for those who suffer an unexpected misfortune. Life insurance is a way to protect your survivors and dependents against financial hardship. A life insurance contract or policy is a legal agreement between you and an insurance company that guarantees payment of the face value of the policy, upon death.

How Much Is Enough?

How do you figure out how much life insurance you need? A ballpark measure sometimes used is between five and seven times current net income. But to work out the specifics of your own situation, you'll want a financial needs analysis. It gives you a picture of the capital your survivors need when you die. It looks at assets that would be available to them, liabilities they would have to deal with, and continuing family needs for income.

Our expertise can definitely help you to find the right type and amount of life insurance taking into consideration your goals, desire and financial ability. A qualified life insurance agent can help you work out a more comprehensive financial needs analysis. It's important to review your insurance needs regularly. As your family or business situation changes, so may your insurance needs. Beware, too, of future inflation and the way it could erode your insurance.

What Different Policies Will Do for You?

Though it seems there is a bewildering array of policy types and names, they all boil down to two basic forms of life insurance: permanent and term. As a rule, permanent needs should be covered with permanent insurance, temporary needs with term insurance. Often, a combination of policy types does the best job for you.

So, what is a temporary need? A mortgage; high needs for continuing income when your children are young; some business obligations; and so on.

Permanent needs? Funeral expenses; supplementing asurvivor’s income; covering capital gains taxes at death,especially if family property is to be passed on to the next generation; and children who remain dependent for their lifetimes, often dueto a disability.

Permanent life insurance has several variations: whole life, universal life, variable life. All are designed to provide insurance protection for your entire lifetime, as long as you keep the policy in force.

Basic features of permanent policies:

Level premiums: Most permanent policies have premiums that remain level over the lifetime of the policy, even though the risk of death increases with age. To achieve this, the premiums charged in the initial years are higher than the risk you represent then and are invested to form policy reserves that subsidize the premiums paid in later years when you are older and the risk is higher.

Cash values: These reserves accumulate cash value, or cash surrender value. The cash value is available to you if you want to borrow against your policy or to cancel (surrender) it.

Non-forfeiture options: These are choices available to a policy holder if he or she discontinues premium payments on a policy. They allow the policyholder to keep the policy in force or to take a cash settlement.

Participating policies and policy “dividends”: A participating policy shares in the financial experience of the insurance company, and policy “dividends” are declared annually and paid to policyholders.

Premiums are based on conservative estimates of future expenses, death claims and interest or other investment earnings. When experience is more favourable than these estimates, a surplus is created, which allows the company to credit participating policyholders with dividends. Because dividends are based on future experience, such as costs and earnings, they are not guaranteed. Dividends can be paid in cash, left in the policy to accumulate, used to pay part of the premiums, or used to purchase additional insurance.

Non-participating policies: A non-participating policy does not share in the insurer’s earnings and does not receive any dividends.

Variations of permanent insurance:
Although every permanent insurance policy is designed to provide you with coverage for your entire life, the guarantees vary in different policies. This, in turn, affects the premium you pay.

Whole life: This is the traditional policy that fully guarantees the level of premiums you pay, the death benefit and the growing cash values within the policy.

Interest-rate sensitive policies: Unlike whole life policies, which use very long term interest rate assumptions, these policies use current interest rates, which can be adjusted periodically if interest rate levels change. This offers the policyholder the potential of getting more coverage for less premium, but it involves sharing some of the risk with the insurer. Premiums could be increased if interest rates decrease. On the other hand, premiums could be decreased if the reverse holds true.

The most popular and flexible of the interest-rate sensitive policies is universal life. It consists of two parts: life insurance and an investment account. You decide what to do with each part of the policy, and you can increase or decrease your premiums and your death benefit, within certain limitations. Earnings on the investment account may or may not be guaranteed, depending on the type of investment chosen.

“New money” or “adjustable” policies usually guarantee the premiums and death benefit for a specified stretch of time (e.g., five years) and re-adjust the premiums and/or death benefit at the end of the period, according to investment conditions at that time.

Variable life: Here, the premiums usually are guaranteed, but the cash values vary according to the performance of an investment fund or other index. The death benefits may be guaranteed or may vary with the fund’s performance, subjectto a minimum guarantee.

Term policies provide insurance coverage for a specified period (e.g., a fixed number of years, or to a set age) and then expire. A death benefit is paid only if you die during the term of the policy.  Term policies are commonly available for terms of one, five, 10 or 20 years, or to age 60 or age 65. The premiums usually remain level during the specified term but increase if that term is renewed (e.g., premiums would increase every five years on a five-year renewable term policy).

If your immediate obligations are large and the funds available to spend on insurance are small, go for whatever insurance policy will meet your needs now. If your choice is term insurance to start with, make sure it’s renewable and convertible into a permanent policy. This will give you the flexibility to make changes later on.

TERM TO 100
Often categorized as a permanent plan, term to 100 policies provide life insurance coverage through to age 100. Usually they don’t pay dividends or include cash values, though some may provide other non-forfeiture values. Accordingly, premiums are lower than for traditional whole life policies.

To compare the features of different types of policies, see the following chart (click on the images below).