Term Life Insurance Explained
“Fun is like life insurance; the older you get, the more it costs.” – Kin Hubbard – American Humourist – well, when talking about term life insurance, this is certainly true – the insurance companies even guarantee that the cost will go up in their policies!
Term insurance is supposed to be the least-expensive temporary kind of life insurance available and is designed to be out of force when most people die – past age 75. It isn’t an accident it was created in that manner.
The need for term life insurance is simple and obvious: people may need large amounts of temporary coverage for either re-payment of debts, or to provide income replacement to dependent family members when a breadwinner passes away.
Term products have come and gone over the years in various disguises, but today, we are left with two types – level renewable term that normally expires by age 75 or so plus Term-to-100, which is simply permanent insurance with no cash values so despite its name, it isn’t term insurance anyway!
We used to have reducing term – which had a level premium for the entire term but the face amount reduced each year – roughly in line with the outstanding balance of a mortgage or other fixed-term loan. I am not aware of any such coverage being available in Canada any more other than as Creditor Group Insurance sold by various lending institutions and credit card companies.
So back to the renewable term products – today, usually available as 5-, 10- or 20-year renewable term. Premiums increase at every renewal date and are guaranteed in the policy for each successive renewal period until the expiration date – usually age 75 but sometimes as late as 80 or 85 – for a MAJOR increased premium. Very few people into their 70s or better are happy paying premiums that may triple or quintuple in a 5-year period – so they let it lapse – exactly what the insurance companies expect, and want!
As mentioned earlier, many lending institutions and credit card issuers promote credit life insurance, along with balance payment coverage or disability income payments if the borrower us unable to work as a result of a covered illness or accident. To be sure, these extra coverage do provide benefits in the event of a covered death or disability – but there are restrictions – as you would expect. Most important is that the borrower or cardholder does NOT own the coverage – the lending institution or card issuer owns the policy. The borrower or cardholder don’t set premium rates – which normally change either every year or in 5-year age bands – the premiums are set entirely at the discretion of the insurance company. Third, the borrowers’ or cardholders’ family are not the beneficiary of the life insurance – the institution or issuer is the beneficiary – and it is the same on the disability benefits – benefits are payable not to the insured person but to the lenders. The lenders are protected but how much protection is really in place for the borrowers and their families?
There are two other issues flying below the radar. The first is that either the insurance company or the lending institution/card issuer can cancel the coverage at any time without advance notice to covered borrowers or cardholders. The second point is that this type of coverage is not portable. If you move your mortgage to a new institution, they might not offer creditor insurance at all – so now what?
Not to kill this discussion, but finally this coverage is not as cheap as it may appear. In virtually all cases, a client is better served with more appropriate coverage, terms of coverage, premiums, portability and control of the plan by purchasing personally-owned coverage through a qualified financial advisor. Regardless of your desired approach, make sure to get answers regarding all of these points – caveat emptor – let the buyer beware!
In closing – a quote from a most intriguing Canadian gentleman: “I detest life-insurance agents; they always argue that I shall someday die, which is not so.” – Stephen Leacock – Canadian Humourist