When buying life insurance a person will
want to consider various factors about their financial needs and about why they
want insurance in the first place. What do you want to protect? What is an
affordable premium? Are my needs flexible? What is the ideal amount of
coverage? Do I only require temporary protection? By asking these questions,
the type of policy that will fit your need becomes apparent. While there are
many types of policies today, we will explore “Term” insurance.
How substantial you policy should be is
also determined by things like mortgages and how complex needs become. Small
business owners, for example, may want a fixed rate payment to help with
budgeting, where a young family may use coverage as an aid in paying tuition.
To begin with, “term” insurance refers to a
life insurance policy where the premium is locked in for a specific number of
years. The term is the number of years. For example, a 10 year term policy
carries a premium which is guaranteed for 10 years. The premium will not change
over a 10 year period. After the first 10 years pass, the policy may renew
(without the need for the client to show medical evidence) and the premium will
increase beginning in the 11th year, for a second 10 year “term” of
time. A policy like this often continues to renew with premiums increasing
every 10 years until the policy ends at say age 85. Term polices used to end at
age 65 but can also continue to age 85, depending on the company.
The premium at the “term” renewal is often
stipulated in the policy and the increased future premiums are guaranteed. This
makes the policy dependable, and convenient for future plans. The affordable
nature of a term policy allows a person to protect their family or small
business with a substantial amount of coverage with a guaranteed fixed rate
premium.
In today’s financial environment, the 20
year term has become very common. The 20 year “term” guarantees a premium for
twice as long as a 10 year policy. This becomes convenient when you want to
have additional protection during child-raising years. As one might imagine,
there are as many type of polices are there are needs. Available today is a 1
year term, where the premiums increase every 365 days, and there are products
referred to as Term to 100 where the insurance companies offer a level guaranteed
premium directly to age 100.
While a term policy will provide temporary
protection for temporary needs like (mortgages, car loans, line of credit,
child-raising years), people often outgrow their initial requirement. In other
words, you may first buy a term policy for one reason, changes in life may
require you to keep the policy for longer than you first imagined. This is why
a term policy should be purchased with a “conversion” option. The conversion
option allows you to “change” your policy into a longer lasting policy known as
a permanent policy. This will be covered in a future blog.
A Term insurance solution can be as unique
as your situation itself. Often your requirements change with your life and
lifestyle. If you consider your “Financial Path of Life” a person wants to
first pay off debt, then gets married, have children, buy a home, reduce debt
again, pay for education costs, save for retirement, change career, retire, and
then dies. (Specific order not important). As you grow in life, your need for
insurance will also change- both up and down. One tailored solution is to
“ladder” your coverage. This means if you can anticipate your requirements for
insurance, you may also buy a combination of term insurance products. This way
your premium can be locked in at your younger age, yet the amount of insurance
changes with your need.
By way of example, you have a mortgage and
two children and you are married. If you were to die, you might want to have
the mortgage paid off, provide a lump sum of cash to supplement your spouse’s
income, and provide for education costs. After 10 years, you expect the
mortgage to be paid, you would have likely saved for the kid’s education, yet
you would like to supplement your spouse’s income still. A solution might be to
buy 20 year term for $100,000 and a further $100,000 in a 10 year term policy.
With this ladder of insurance, based on your age today, would cover you for
$200,000 for the first 10 years, then the ladder dropt the coverage to $100,000
for the remaining 10 years. At the end of the 20 years the insurance would be
diminished, and the coverage is gone.
If you are in Nova Scotia and would like
some insurance advice, please contact Corry Collins:
902-444-7000
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