School me on: Life Insurance

[etodac]

I've toyed around with the idea of having life insurance and I'm looking for some opinions. Pros, cons, opinions, and where to get to go it. Thanks in advance.

[radioman]

Send me a PM if you want info.

[yray]

^

[Speed2K]

Full disclosure, I'm a Financial Advisor I don't know what your needs are so I'm not giving you any advice in this post, I'm just trying to answer your question. I'll also preface by saying that I'm a believer in life insurance, it's not because I sell it (it's bitter-sweet, b/c we didn't really want the proceeds from it as we would rather have the family member still with us ) but the fact is Life Insurance has come through for my family.

Let's get to your question! There are a few different kinds of Life Insurance. What you end up choosing depends on what your needs are, how long you want to keep it for and ultimately how much you are willing to pay.

Term Insurance is the most basic and cheapest type of insurance. Term insurance is normally used to cover a temporary insurance need, an example being to cover a mortgage while the loan is outstanding; once paid off, the insurance might be cancelled because there's no more debt obligation. Sometimes people have a permanent insurance need (i.e. tax liabilities after death, probate fee, or funds to pay for final (funeral) expenses) but they still may choose a term insurance policy because it's relatively cheap and perhaps all they can afford. A major disadvantage with a term policy are usually the terms are for 10 or 20 years; after the 10 or 20 year period is up, the premium goes up. Also, term policies usually have an expiry date at age 80 (older policies might be even earlier), if someone dies shortly after a policy expires, it won't pay anything. Term policies don't usually last that long anyways b/c the renewal premiums when someone is in their 70's is usually so high that they probably can't afford it.

Permanent insurance provides a life time insurance protection and normally the premiums are fixed at the start of the policy and will never increase. The initial cost though is higher than for term. While Term Insurance might not pay out (if policy is cancelled or expires) Permanent Insurance will be paid out sooner or later. Most permanent policies have an investment component that grows tax deferred. When discussing permanent insurance you might hear stuff like Universal Life, Whole Life, Cash Value, Pay Life, Limited Pay, etc... I think it's good to focus (if you can afford the higher premiums) on a Limited Pay option, such as pay premiums for 20 years; after the 20 years are up you won't need to make anymore payments but you get to keep the policy for life.

An analogy used is Term insurance is like renting a place, you pay as long as you rent but you will never own the place and once you move out you'll get nothing back. Permanent insurance is like buying a home and paying a mortgage. Once the mortgage is paid off, you own the home. If you decide you don't want the place anymore you can sell it and get some money back.

Note that it is also possible to have a combination of term and permanent insurance coverage. Message me if you want more info.

This is the basics! Whatever you decide, get it early; it gets more expensive as you get older and if your health is not good you may not qualify. Good luck!

TL/DR:

Term Insurance

Pro: Simple & relatively inexpensive
Con: Temporary, get nothing back if cancel, can expire.

Permanent

Pro: Life time coverage, will payout sooner or later, investment component, and premium (cost) usually never changes
Con: more expensive than term.

Buy early, 'cuz it's cheaper when you are young and healthy!

*Should also look into and consider Critical illness insurance.

[radioman]

Originally Posted by Speed2K

*Should also look into and consider Critical illness insurance.

Thanked for this.

Remember your greatest asset is your ability to earn an income not your house, car, etc. Without your income you wouldn't have these lovely things.

I'm a big believer in living benefits (Critical Illness, Disability, Long term care) as it helps protect you while life insurance is great for protecting your loved ones.

Like Speed2k mentioned we can ramble on and on about the pro's and con's but life insurance isn't exactly simple it needs to be tailored to you and your current needs. Sitting down with an insurance advisor/financial planner for 15-20 minutes would go a long way.

[4444]

Look at what ur work provides u (life, critical illness)

Do u have a wife, kids, or other family that (whether u know it or not) rely on u? This drives ur insurance needs

I currently just have what my work gives me (I live in no country where it is high anyway on all fronts, and my company is also very generous), so no need for me to get more.

When I get married, probably the same

As soon as my future wife (known (to both of us), not some mythical creature) is pregnant, I will get a monster term life insurance policy to cover that kids' upbringing if I died (20 yr policy, either as a 10 and a 10 or a 20), by the end of that my assets will cover my wife's needs, plus she will back way back into her career, and my kids will have their education taken care of - they will have every opportunity to thrive in life, which is my goal if I died, with my wife comfortable being single (whether she stayed that way or not)

So, with that, think of ur life plan and how insurance fits into that.

As far as I know, financial advisors make a lot off insurance, but are a good resource.

[tiger_handheld]

@ Speed2k:
I've heard of policies where you pay the premiums for 20 years or whatever, and you get some cash back at the end. Afterward, it is up to you what you want to do with that cash.

Is this type of policy available in Canada? If it is, can you provide some details?

[radioman]

@Tiger what you're talking about is a participating whole life plan. There are a lot of insurance companies in Canada and many offer this type of product. Some are better than others.

Many have different payment lengths like 10/15/20.

These products pay a dividend every year and you have different options on what you would like to do with this dividend. You can take it in cash, or buy more insurance. The most popular option I see is buying more insurance which makes the death benefit grow over time.

The cash value growth is tax deferred and you can take it out when you wish. If you do so and you had originally wanted the dividends to buy more insurance that portion will go down as you start taking cash out.

This type of plan is expensive and it really becomes a growing 'asset class'. Many people who have large partiicpating life polices are those who want to leave a legacy for their family and this is a great way to do so.

@4444 While you're correct in your post it might be a good idea to get that term policy sooner rather than later. Although you're waiting for your child to be born you don't know what could happen between now and then. Locking in insurability is one of the reasons people buy a large T10/20 policy at a younger age. Coupled with the fact that the premiums will be reduced due to a younger age.

An example would be someone being diagnosed with non life threatening cancer or having a heart attack and now that person is declined for a long period of time from get life insurance. We don't know when or if these things will happen.

The waiting game isn't a good one to play with insurance.

[4444]

Originally Posted by radioman

@4444 While you're correct in your post it might be a good idea to get that term policy sooner rather than later. Although you're waiting for your child to be born you don't know what could happen between now and then. Locking in insurability is one of the reasons people buy a large T10/20 policy at a younger age. Coupled with the fact that the premiums will be reduced due to a younger age.

An example would be someone being diagnosed with non life threatening cancer or having a heart attack and now that person is declined for a long period of time from get life insurance. We don't know when or if these things will happen.

The waiting game isn't a good one to play with insurance.

Sounds exactly like the response from an insurance sales person that makes commission on each policy.

I'm financially literate enough to assess the risks and benefits of my situation.

The insurer always wins in the long run, just like the house always wins in gambling.

[Speed2K]

Originally Posted by tiger_handheld

@ Speed2k:
I've heard of policies where you pay the premiums for 20 years or whatever, and you get some cash back at the end. Afterward, it is up to you what you want to do with that cash.

Is this type of policy available in Canada? If it is, can you provide some details?

Originally Posted by radioman

@Tiger what you're talking about is a participating whole life plan. There are a lot of insurance companies in Canada and many offer this type of product. Some are better than others.

Many have different payment lengths like 10/15/20.

These products pay a dividend every year and you have different options on what you would like to do with this dividend. You can take it in cash, or buy more insurance. The most popular option I see is buying more insurance which makes the death benefit grow over time.

The cash value growth is tax deferred and you can take it out when you wish. If you do so and you had originally wanted the dividends to buy more insurance that portion will go down as you start taking cash out.

This type of plan is expensive and it really becomes a growing 'asset class'. Many people who have large partiicpating life polices are those who want to leave a legacy for their family and this is a great way to do so.

To expand on what radioman wrote, the "get some cash back at the end" is referred to as Cash Value. There is a lot of misconceptions about the cash values though, sometimes people "hear" things from their friends, but their friends only remember bits and pieces. Once a policy is paid up (i.e. finish paying the premium for 20 years) if someone withdrew ALL their cash values they would essentially be cancelling their life insurance policy. Of course this is a simplistic way of looking at it because there are a lot of other variables.

[Speed2K]

Originally Posted by radioman

@4444 While you're correct in your post it might be a good idea to get that term policy sooner rather than later. Although you're waiting for your child to be born you don't know what could happen between now and then. Locking in insurability is one of the reasons people buy a large T10/20 policy at a younger age. Coupled with the fact that the premiums will be reduced due to a younger age.

An example would be someone being diagnosed with non life threatening cancer or having a heart attack and now that person is declined for a long period of time from get life insurance. We don't know when or if these things will happen.

The waiting game isn't a good one to play with insurance.

Originally Posted by 4444

Sounds exactly like the response from an insurance sales person that makes commission on each policy.

I'm financially literate enough to assess the risks and benefits of my situation.

The insurer always wins in the long run, just like the house always wins in gambling.

I'm not trying to fear monger, I'm just relaying my experience.

I had a client, aged 35, he got married and bought a place with his new wife. He had purchased a small term policy from me a few years before but it wasn't enough to cover their mortgage so he wanted additional insurance coverage. We applied for additional coverage for him but he was declined by multiple life insurance companies. His brother had passed away a couple of years prior (aged 38) from a heart attack; it turns out their family had a hereditary disease linked to the father's side and so he was deemed uninsurable. Granted this is a rare case, but shit does happen. Thankfully he at least has the small policy from before.

[Hehe]

IMHO, get life insurance only if you have nothing to fall back on. Beyond that, I might suggest getting some coverage for critical illness (something that would pay for all the treatment beyond health care) but that's about it. Life insurance doesn't make much sense to me.

Both my wife and I earn an ok income. Nothing to brag about but definitely enough to cover the family expenses should the other suddenly stops working completely. Ultimately, I have investment properties in US that provides the last layer of cushion if anything happens to us.(knock on wood). That should at least give us shelter, food and some basic necessities. Then we try to save about 15% of our wage every month for the unexpected, although it's mainly about unexpected purchases

If you are risk averse, and family can't afford to lose you, get a permanent life insurance. Else, invest that money into something that would create layers and layers of cushion. Insurance companies do the same thing. They just create a cushion large enough to cover a percentage of the clients (or whatever chance they have calculated) while leaving everything else as profit.

[nsx042003]

the only time I see insurance being a good thing is accidental death. but then again, I'm more biased towards putting away some savings yourself every year to help with the unexpected. here's what I'm not very clear on, does the payout at the end equal to what's being put in? if not why would I want such a thing? I guess unless I accidentally died, then yes insurance helps. I guess it would also make sense if you have dependents, because ultimately that's what insurance is for...to protect the ones financially unable.

I'd say if you have no dependents, what's the point? for all it matters, I guess whoever wants to hold onto your belonging after you die should be the one buying insurance, it's sort of like buying a lottery ticket. (that sounded bad but that's how I see it)

[radioman]

Originally Posted by nsx042003

the only time I see insurance being a good thing is accidental death.

Thats where the products where you pay for a set number of years, say 15, and then the death benefit increases over time comes into play. For example;

45 year old male paying $10,000 a year for a 15 pay whole life plan. Total of $100,000.

If the dividend stays where it is at for the clients lifetime (it will go down or up over time) the payout will grow from year 1 = $164,000 to year 85 (life expenctancy) $631,056. Tax free. You can run a comparison with an alternate investment. You're giving up liquidity with the insurance option but there are ways to access the money in it.

Like I said these values are not guaranteed but based on the dividends performance. It is however guaranteed to be at least the benefit amount in year 1 of $164,000.

Originally Posted by nsx042003

here's what I'm not very clear on, does the payout at the end equal to what's being put in? if not why would I want such a thing? I guess unless I accidentally died, then yes insurance helps. I guess it would also make sense if you have dependents, because ultimately that's what insurance is for...to protect the ones financially unable.

The first part touchs on your question or where you said you were a little unclear. Plans that don't pay a dividend and are paid throughout your life don't look as good. The internal rate of return is somewhere around 3-5% at life expectancy. Like you said, its for that accidental death at age 50 that it really gives you more than what you're putting in.

Then there are the Term 10 and 20 etc plans that are designed for short needs like mortgages or key man insurance for a business. These policies generally lapse or the client no longer needs them before a claim gets submitted. Thats why the cost is incredibly low.

I'd say if you have no dependents, what's the point? for all it matters, I guess whoever wants to hold onto your belonging after you die should be the one buying insurance, it's sort of like buying a lottery ticket. (that sounded bad but that's how I see it)

You're pretty spot on here. For single people with no dependents living benefit products are where you should be concentrating on. Criticial Illness, Disability etc. Cover your own in case something happens.

[mr_chin]

Sorry to hijack this thread.

My dad bought life insurance for me and my brother when we were very young. The first time I remember seeing the life insurance was when I was around 8ish.

Now, being 29, my dad hands me the bill and I pay for it (he gives me back in cash). I remember when I got my second job, he demanded that I start paying it on my own, until I told him I didn't want to. Doesn't something like this requires my consent when I reach adult? I have no idea who the beneficiary is or any information about it. Is it wrong of him to hold information from me since the insurance is for my life? Is it my right to get information about it and if so, how can I go about doing it? I know he won't tell me. I remember having a brief discussion when I didn't want to pay for it, I asked him if we cancel, will we get money back, and he said yes.

[radioman]

I don't really understand your situation.

Why is your father not sharing information with you?
Are you part owner on the policy? Are you being billed directly or is your father the payor?

As long as your parents are the sole owners of the policy you wont have any access to the any info regarding to that policy even though you're the insured.

I would suggest contacting the advisor your parents dealt with if you know who that is any try and get some more information from him. You can always ask your parents to switch ownership but it sounds like they're unwilling for some reason.

[SumAznGuy]

Not to uncommon for parents to buy life insurance for their infant/young children.
Most likely it is some form of permanent insurance.
When you were a child, your parents are your legal guardians and I believe they are allowed to buy life insurance for you. My dad did the same thing for my younger brother.

But since the insurance was purchased at such a young age, there might not be any good reason for you to cancel the policy now.

[mr_chin]

I would think that once someone reach the legal age, they would be required to sign a consent to that insurance or something.

I don't really care about the insurance being in existence, as long as I'm not paying for it. And if I was to pay for it, then I should know information about it and to be able to choose my own beneficiaries.

But yes, when I told my dad to cancel it, he said he's been paying for it since we were very young but never said why or whatever to keep it.

I mean, if he can cancel it and get some money back, if it's a big chunk like close to $100,000, then I don't see why not. Is he going to keep paying until he hit the graves? *knock on wood* Is he waiting for something accidental to happen to me so we'll get some money? What is the benefit of paying this for the next, say, 10 years? I know he's not going to keep paying unless he's benefiting or will benefit from it.

[ZN6]

Step 1: Find out exactly what kind/type of policy it is you have. Until you do, no one can help you.

Without knowing anything about your policy there's nothing useful you can gain from what anyone says about your particular situation.

It should not be hard to discern what it is that you are insured for if you have your hands on the contract in whole. Tell your dad that if you're paying for something (even if he reimburses you in cash) you should still have a copy of whatever it is you are paying for and understand what it is you are throwing down money for.

If you do terminate your policy it most likely would not pay out the face value amount that you are insured for, but it will pay out the cash surrender value that your policy has accumulated over the years.

And even that has variations.

It's much harder to explain this when the product you are buying is intangible. It'd be like asking Revscene: "My dad's leased a car for me but I don't want to pay for it anymore. How do I go about disposing it and taking the value back from the sold vehicle."

Well, without knowing the terms and what type of car it is or condition on what your dad has signed to we can't tell you squat about it's value and what your options are.

[HondaCRZy]

I heard you can use it as collateral (use the value to take out a loan), is this true?

[Speed2K]

^yes, but only for policies that have Cash Value.