Term life insurance may not compare to traditional options

At the start of the new year Americans often look to the future. They spend time thinking about their yearly finances, their income and how they can invest and grow their assets over the next 12 months.

As a result, many consumers will want to compare life insurance quotes and review policies to help protect their families and loved ones in the event of an unfortunate event.

However, those who seek out new policies may want to avoid term life insurance because it can provide a number of drawbacks when compared to traditional coverage options.

In an interview with WalletPop, insurance agent Alan Canton said taking out this policy can be the equivalent of renting a home, and wasting what could have been built up to be a valuable asset. In addition, he says that while it can look like a more inexpensive option to those who compare insurance rates, it excludes some features that could help consumers in the long run.

Canton says the fact that money spent on a term life policy does not go into a forced savings account is a major drawback to the policy. These savings accounts can be beneficial as they earn interest and allow consumers to borrow against accumulated funds, typically at low interest rates, when they fall on hard times.

Additionally, he says when term life coverage runs out, it must be renewed, often at a much higher cost due to factors such as the insured's increasing age and declining health, the news source says.

Canton also says as much as 92 percent of consumers who invest in term life coverage never see any benefits. This is because many let these policies lapse long before they die. As a result, this coverage is more affordable for consumers, because insurers know they do not have to make payouts on these policies, according to the news source.

By comparison, those who invest in whole life insurance can be assured that their families will be well taken care of no matter what happens in the future, as these funds typically don't expire.

However, individuals who purchase a traditional type of coverage also pay much higher rates, which may be out of the price range for many consumers. As a result, these consumers may want to choose a term life policy over leaving their family unprotected.

Consumers who want to invest in life insurance this year can benefit from taking the time to compare quotes from different sources, and choosing the one that best fits both their short-term and long-term financial plans.

Financially Speaking: Know rules on borrowing from a life insurance policy

One of the basic components of a comprehensive personal financial plan is an analysis of risk exposure.

For most families, the premature death of a breadwinner, particularly when children are young, can be financially devastating. In most of these types of situations, the purchase of term life insurance will provide the largest amount of death protection at the most efficient cost, but sometimes more permanent forms of insurance coverage are more appropriate.

Many types of insurance policies are designed to accumulate cash value over time. The insurance industry has done an excellent job marketing the advantages of such policies, some of which include the ability to take tax-advantaged withdrawals (under current tax law, at least) and the ability to borrow against their cash value. I'll reserve the controversial topic of insurance as a retirement planning vehicle for another column. Today, I'd like to concentrate on the features and pitfalls of policy loans.

As access to credit has become a greater challenge, life insurance policy loans have become an attractive alternative to cashing in policies as a source of funds for people who may be unable to obtain money from other sources. Credit checks are not required. The loan interest rates of many older policies can be quite attractive compared to credit card cash advances or other types of loans. Most policy loans do not require repayment, a feature that can be helpful to a borrower who has serious cash flow difficulties. Some policy loans are structured to use the cash value as collateral for the loan instead of being withdrawn. In these cases, the entire cash value balance continues to generate dividends, earnings, in the form of interest for whole life and universal life policies, or appreciation potential for variable policies.

Potential pitfalls of policy loans are numerous, however:

Loan balances, plus accrued interest, are subtracted from the policy's death benefit. You might jeopardize the financial security of your family if you die prematurely without replacing the diminished death benefit with alternative coverage.

If you cancel a policy that has an outstanding loan balance, you'll receive its cash or surrender value, less the balance on the loan and accrued unpaid interest.

If you don't make an interest or principal payment, the unpaid interest will be added to the loan principal, which will increase the amount of interest that will accrue the following year.

If you never make any interest or principal payments, your loan balance will grow at a pace that is likely to erode your cash value.

If your loan balance exceeds your cash value, the insurance company will ask you to make a premium payment to cover the difference to keep the policy in force. If you cannot do so, the policy may lapse, which will result in the loss of the entire death benefit.

Depending upon your age and health status, you might not be able to replace the coverage.

In addition to the risk of losing your life insurance protection, you might also be hit with a tax bill if you cancel a policy whose loan balance exceeds the cumulative amount you paid into the policy. The difference between the loan balance and your cost basis in the policy may be considered taxable income.

If you are considering a policy loan, proceed cautiously. Be sure you understand all of the requirements and potential costs and risks to avoid inadvertently damaging your family's financial security.

Elaine Morgillo is a certified financial planner and president of Morgillo Financial Management Inc. She can be reached at emorgillo@morgillofinancial.com.

Guardian Life Exits Long-Term Care Insurance Market

The Guardian Life Insurance Company of America announced Friday that it would be exiting the long-term care insurance (LTCI) market as of the end of 2011. Although no new policies will be sold after the end of the year, all existing policies will remain in force, and are guaranteed renewable as long as premiums are paid.

Gordon Dinsmore, president of Berkshire Life Insurance Company of America, the Guardian subsidiary that underwrites and issues its LTC policies, said in an interview that the company had not been in the business of LTC for a very long time—it entered the LTCI market about five years ago—and after a strategic review in 2010 decided that it would be better to focus on growing its life and disability insurance.

The coverage had been added primarily for career agents to have a LTC product for their client base, he added, not as an attempt to capture market share, and it amounted to less than 1% of the company's business as a percentage of premiums, with 8,000-9,000 policies in force.

"I know our policyholders are in good shape," Dinsmore said. "We're a highly rated company and we're very stable. ... We've announced no plans for any rate increases, as other companies have. We're very committed to having good service and honoring all claims."

John Ryan, of Ryan Insurance Strategy Consultants in Greenwood Village, Colo., said "there's not much to tell" about Guardian's exit from the LTC business, since it was such a small part of the company's business. However, Ryan added that the LTC business itself might "whittle down to 10 companies that write 99% of the business, maybe five companies." Exiting the business was "probably a great move" for Guardian, he added; "if Guardian Berkshire feels like they need to do this, they don't make mistakes. It's a solid company for a reason."

Ryan added the government's involvement through the CLASS Act probably is "spooking companies. How much money do they want to pour into this to get overrun by some kind of government program?" he asks. "Companies are choosing what they do best and what they're most sure of going forward."

Term life insurance

Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.

Term life insurance is the original form of life insurance^{[citation needed]} and can be contrasted to permanent life insurance such as whole life,universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual^{[dubious – discuss]}. Term insurance is not generally used for estate planning needs or charitable giving strategies but for pure income replacement needs for an individual. Many permanent life insurance products also build a predetermined cash value over the life of the contract, available for later withdrawal by the client under specific conditions. However, on most cash value policies like Whole Life insurance, the only way to receive the cash value is to cash out the policy. The beneficiaries receive the face value of the insurance but NEVER the cash value with Whole Life policies. Financial advisers generally advise buying term life insurance and investing the difference elsewhere to those who still qualify to contribute to other tax-deferred investment growth such as IRA's or 401k's.^{[1][2][3][4][5]}

Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, a fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.

Contents  [hide] 1 Usage 2 Annual renewable term 3 Level term life insurance 4 Payout likelihood and cost difference 5 See also 6 References

[edit]Usage

Because term life insurance is a pure death benefit, its primary use is to provide coverage of financial responsibilities, for the insured. Such responsibilities may include, but are not limited to, consumer debt, dependent care, college education for dependents, funeral costs, andmortgages. Term life insurance is generally^{[how often?]} chosen in favor of permanent life insurance because it is usually much less expensive (depending on the length of the term)^{[citation needed]}. Many financial advisors or other experts^[who?] commonly^{[how often?]} recommend term life insurance as a means to cover potential expenses until such time that there are sufficient funds available from savings to protect those whom the insurance coverage was intended to protect. For example, an individual might choose to obtain a policy whose term expires near his or her retirement age based on the premise that, by the time the individual retires, he or she would have amassed sufficient funds in retirement savings to provide financial security for their dependents.

[edit]Annual renewable term

The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit is paid if the insured dies one day after the last day of the one year term. The premium paid is then based on the expected probability of the insured dying in that one year.

Because the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchase of only one year of coverage is rare.

One of the main challenges to renewal experienced with some of these policies is requiring proof of insurability. For instance the insured could acquire a terminal illness within the term, but not actually die until after the term expires. Because of the terminal illness, the purchaser would likely be uninsurable after the expiration of the initial term, and would be unable to renew the policy or purchase a new one.

Some policies offer a feature called guaranteed reinsurability that allows the insured to renew without proof of insurability.

A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.

[edit]Level term life insurance

Much more common than annual renewable term insurance is guaranteed level premium term life insurance, where the premium is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20, and 30 years.

In this form, the premium paid each year remains the same for the duration of the contract. This cost is based on the summed cost of each year's annual renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.

Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. It is important to note that the renewal may or may not be guaranteed and the insured should review their contract to see if evidence of insurability is required to renew the policy. Typically this clause is invoked only if the health of the insured deteriorates significantly during the term, and poor health would prevent them from being able to provide proof of insurability.

[edit]Payout likelihood and cost difference

Both term insurance and permanent insurance use exactly the same mortality tables for calculating the cost of insurance, and a death benefit which is income tax free, as long as the policy is in force and premiums are current; however, the premiums are substantially different.

The reason the costs are substantially different is that term programs may expire without paying out, while permanent programs must always pay out eventually. To address this, permanent programs have built in cash accumulation vehicles to force the insured to "self-insure", making the programs many times more expensive.

Insurance industry studies have shown that the probability of filing a death benefit claim under a term insurance policy is unlikely.^{[citation needed]} One study placed the percentage as low as 1% of policies paying a benefit. The low payout likelihood allows term insurance to be relatively inexpensive. The low payout percentage is a combination of there being a low likelihood (in the aggregate) of a random, healthy person dying within a short period of time. Because of the low likelihood of an insurer having to pay a death benefit, term insurance seems better when considered in terms of coverage per premium dollar basis - by a factor of up to 10.

"After-death" ad puts focus on life insurance

This is the storyline of an attention-grabbing new TV advert from insurance company Aviva, aimed at "encouraging families to think about taking out life insurance".

To coincide with the ad, the firm has issued research which claims millions of people are ignoring the need to protect themselves against the debts that can arise from unforeseen shocks such as redundancy, illness, or, in the worst case, death.

The insurer found that 93% of families feel they have inadequate financial protection. Despite this, it says "few have taken steps to remedy this situation" by taking out some sort of cover. More than 60% of families do not have basic life insurance, with single parents the most likely category not to have protection insurance, which also includes private medical insurance, income protection and critical illness cover.

The findings are contained in Aviva's first Family Finances Report, which looks at the financial pressures faced by the 84% of the population who live as part of a "UK modern family": which, perhaps oddly, some might think, includes couples without children.

The company says it found that "families will prioritise paying off unsecured debts and setting up savings accounts ahead of financially protecting their loved ones and homes". As to why they don't have life insurance or some other sort of cover, 19% of those quizzed said they thought it was too expensive and they could not afford it.

Some may be cynical about the timing of the findings, bearing in mind the campaign to promote Aviva's cover was also launched this week. The insurer says the TV ad is unusual for its "post-death" setting, and is likely to divide opinion. Some have praised it for its subtlety, though others may view it as scaremongering.

Aviva accepts it is "a slightly disturbing approach". However, a spokeswoman was unapologetic, saying it had carried out customer research, and many people said they would be most likely to be respond to something more emotionally challenging, "as this would be the prompt they needed to put cover in place". She said: "We hope this campaign will go some way to make sure as many families as possible have life insurance." She also pointed to data from bereavement charity Grief Encounter showing that one in every 29 children under 16 in the UK loses a parent.

Aviva is brave in launching another controversial ad so soon after its last one – for annuities, and also featuring Paul Whitehouse – was banned by the Advertising Standard Authority (ASA). That ad said those who were retiring could get "up to 20% more income" by taking an Aviva annuity rather than staying with their pension provider, but last month the ASA upheld complaints that the claim was misleading.

Not everyone needs life cover. If you are single, with no dependents, then you almost certainly don't, as no one will suffer financially if you die (you need to remember to review this if and when your circumstances change). And check what your employer offers. Some workers may already be covered by a policy provided by their company or organisation, or enjoy decent "death in service" benefits that would go some of the way towards protecting their loved ones.

Basic "level term" life insurance is more affordable than many people think. This provides a fixed cash lump sum if you die during the term of the policy. According to Moneyfacts this week, for a monthly premium of £5.94 a 35-year-old non-smoking woman could pick up a policy offering £100,000 of cover for 20 years. That policy is offered by Sainsbury's Finance. Aviva also features in Moneyfacts' best-buy table, though its monthly premium for someone fitting that description would be £6.48.

For a male 35-year-old non-smoker, premiums start at £6.52 a month (from the AA), says Moneyfacts, with Sainsbury's Finance coming in at £7.23 and Aviva charging £7.58.

A hope, a dream and a plan

It's hard to imagine a more enticing vision of retirement than the plan Dave and Debbie have devised.

Debbie, in her early 40s, wants to retire at 50, and Dave, in his mid-40s, has his sights set on age 55. That is, if additional money isn't required to help their teenage son with post-secondary education.

But an early escape plan from the iron shackles of employment would be just the start of their retirement.

"Our plan would be to sell the house and live out at the cottage, which is built for four seasons," Debbie says, adding they may consider part-time work during the first few years of retirement.

"Then we'd possibly become snowbirds to get past the ugly winters."

Earning a combined annual income before taxes of almost $150,000, they've managed to save up about $430,000, mostly through their current and past employer group plans.

They have a combined mortgage of $197,000 for the home in Winnipeg and their cottage, but they have no other debts.

The couple is also well-insured. They have critical-illness and life insurance policies outside their work.

While Dave and Debbie say they believe they have made the right choices, they wonder whether they're saving enough to retire early.

"We don't want to give up our present lifestyle if we don't have to," she says, adding they like to travel and entertain at their cabin. "But if we're doing the wrong thing, and we have to amend, we'll certainly do that."

Certified financial planner Doug Nelson says Dave and Debbie have a lot of moving pieces to their plan.

And the best way to figure out how everything will fit together is to try as best they can to forecast how their retirement income will match up to their expenses.

They have annual expenses of $68,400. This includes many expenses they will not have during retirement, such as RRSP contributions and possibly a mortgage payment. When Dave is considering retirement, in about five years, they will have about $672,000 in savings.

"At a five per cent investment return, this would generate only $33,600 of before-tax investment income," Nelson says.

If they were to sell their home in the city, they would also have additional income if they invested the proceeds from the sale.

"If the house was sold for approximately $310,000 at that time, then the net proceeds from the sale of the home would be $174,000, which could be used to generate more income in retirement," says Nelson, adding this would be the amount left after the mortgage is paid off in full.

"At an investment return of five per cent, (the $174,000) would generate approximately $8,700 in before-tax investment income annually."

This would increase their retirement income -- all flowing from their work pensions and other savings -- to $42,300 before taxes.

"Is this enough? It will depend on their 'part-time income' and their lifestyle 'needs' and 'wants' at that time," Nelson says.

Another consideration is market risk.

"Many believe we are in an extended bear market environment today," Nelson says.

"In this environment, investment returns may be below the long-term trend for some time, such as stock market returns in the minus-two per cent to five per cent range over the next 10 years," he says.

"If this is the case, they want to review their investments to ensure that they aren't relying too heavily on stock market growth."

Alternative strategies that would produce lower but more reliable returns are investments that pay dividends, interest or distributions, such as real estate investment trusts (REITs).

The key to staying on track, Nelson says, is to review their investment strategy regularly.

Still, Dave and Debbie do have some additional room for improvement in their savings strategy. One of their first moves is to start investing in a tax-free savings account.

"The TFSA is a better overall investment option than their plan to invest in Canada Savings Bonds," he says. "In both cases, they're investing after-tax money, but the money that grows inside a TFSA is tax-free, whereas the money in a CSB isn't."

But the problem with CSBs isn't just that they're not growing tax-free. After all, Dave and Debbie could invest the CSBs in a TFSA.

The problem is CSBs provide poor returns compared to other investments, such as GICs, mutual funds and exchange-traded funds. Higher returns over the next few years would provide them with more money for retirement income.

Still, Nelson says, saving outside their RRSP should only be done once they've used up all their RRSP contribution room each year.

"Always maximize RRSPs and pensions first because these investments can be made with before-tax dollars," he says. "The next step is to invest in TFSAs, RESPs and insurance."

These investments are made with after-tax dollars, yet they can grow and be redeemed tax-free.

Nelson says the last choice to invest their money should always be non-registered investments.

At the very least, $50 from one of their bi-weekly CSB contributions should be invested in the RESP. They are currently contributing only $2,200 annually to the RESP, earning $400 in government grants. If they contributed $2,500, they'd get the maximum grant of $500.

Nelson says they can also contribute the maximum of $5,000 a year to recover missed grant money from past years, to a maximum annual grant of $1,000.

"This should be their next greatest financial priority after saving for retirement," he says. "It is a better use of money than investing in the CSBs."

While their savings strategy could use a little work, they have done a good job of using insurance to manage risk.

Having critical-illness insurance (CI) is a good way to make sure a health crisis doesn't send their plans off track. CI pays a lump-sum payment upon diagnosis of an illness, such as a heart attack or cancer, and it would help cover current expenses if one of them is unable to work for a period of time.

Their policies of $100,000 each more than cover their annual salaries -- a good rule of thumb.

As for life insurance, their term life policies of about $700,000 each, in addition to their work-sponsored policies, would likely more than make up for lost income if one of them dies. One concern they did have was converting their term plans to a universal, joint to last survivor plan to help provide tax-free money to cover tax liabilities for their estate when they die.

Nelson says this is a good strategy to consider over the next decade, but the premiums for these plans are more costly than term life, which means they would have less money for retirement savings and day-to-day expenses.

And they will more than likely need as much money as they can get, he says. Dave and Debbie are on track to reach their goal, but they will likely find money tight in the first few years -- especially if they have to help their son with additional post-secondary expenses.

"The best approach may be to gradually retire between ages 55 and 65," he says. As more sources of income become available -- CPP and OAS -- they will have more income flexibility.

"In my view, this is the ideal transition into retirement, given the many uncertainties and the long road of life ahead."

It’s convenient

The convenience of buying insurance online needs no elaboration. There are times when one needs to buy insurance for tax savings before the end of a financial year. If you are running out of time or need savings on premium, you can go online. But convenience is not the reason for choosing an insurance policy. How good an insurance policy is, depends on how claims are settled. Before buying a life cover online, you need to enquire in detail about the claim-settlement process of the insurer.

According to Vipin Anand, chief–corporate communications, Life Insurance Corporation of India (LIC), "Younger customers look for a policy that offers the convenience of buying through mobile (telephony). The most important aspect of life insurance is claim settlement. LIC has the lowest percentage of claims repudiation."

The online insurance space for term-life policies is witnessing the entry of several players. Future Generali has just launched its 'Smart Life' plan. The product aims to tap into the market of young, technologically-savvy Indian customers by providing financial security and protection at a click. Other insurers offering online term life insurance covers are Aegon Religare, ICICI Prudential, MetLife, and Kotak Mahindra Old Mutual Life.

The process is quite simple. Details about employment, income, insurance history, lifestyle, family history and medical history need to be filled in. In case the insurer determines that you need a medical test, your online purchase of term life insurance will not be completed. Once the test is completed and evaluated by underwriting, the policy is issued.

ICICI Prudential's iProtect life insurance scheme asks a person to go for a medical test if he/she already has a life insurance cover. This is because the risk perception is higher when you are buying a second policy. For first-timers, no such test is required. But the company decides whether a medical test is required, on a case-to-case basis.

Aegon Religare's iTerm Plan has policies for three situations. One, if the total sum assured (even if it is through different policies) is Rs50 lakh and above. Two, if the age of the insured is above 40. And three, if the applicant has an existing medical problem.

Future Generali's Smart Life plan offers sums assured ranging from Rs10 lakh to Rs50 lakh. For policyholders buying large sum assured levels, a large discount/rebate is available for sum assured between Rs25 lakh and Rs50 lakh. The brochure does not clarify whether medical examination is required.
The regulator allows insurance companies to charge differential premium for online and offline life products. If you have purchased the product through a branch or agent, they will take up the task of helping your dependents for filing claims.

In case of an online policy, dependents may have to approach the centralised claims cell directly. This may be a cause of inconvenience for some, due to lack of personal connect. That apart, most online term policies are not comprehensive as they either do not offer any rider options or the ones offered fall short compared to those available with offline term policies.

The thumb rule is that life insurance cover should be minimum 10 times your annual salary. It will also depend on your expenses, number of dependents, etc. Online purchase of insurance will make you forego any advice a financial planner can offer you. In case you are dissatisfied with your policy, you can surrender it within the 15-day 'free-look' period.