Life Insurance
Life
Insurance: a basic primer
Life Insurance is like writing a will - we all think about it or
talk about it every so often, but few of us actually do anything
about it! For most people, there's no way to make this exciting
reading - but it's one of the most important things you should be
looking at to protect your family's way of life.
The topics we'll cover
What are the major
uses of personal Life Insurance?
- Take financial care of your survivors, once you’re no longer
there to do it; and to take the burden of worrying about the
financial aspects of your death off their shoulders
- Pay off any outstanding debts - a mortgage, other loans,
credit card balances, etc
- Provide money in the event you are diagnosed with a dread
disease or terminal illness - some policies will advance you part
or all of the death benefit so that you can fill in for lost
income, get the special treatment you want, spend quality
time with your family, etc
- Pay estate taxes and other settlement costs - wherever they
have to be paid
- Provide educational funds for your children or grandchildren
- Supplement your retirement income - life insurance can often
accumulate tax-sheltered funds within the policy
- Charitable donations - life insurance can be used to make a
donation to your favourite charity
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What types of Life
Insurance are there?...
There are 3 basic types of personal life insurance:
- Term Insurance
This can be likened to renting an apartment. It builds no equity
within the policy. If you stop paying premiums, the coverage ends.
And just like the rental lease on an apartment, the premiums can
increase after the initial term of the policy ends. But, in the
short term, it offers the highest amount of coverage for the
lowest cost.
- Whole Life:
This is like buying a house. The upfront costs and annual premiums
are usually higher than term insurance, but those premiums are
generally fixed throughout the term of the policy. Most whole life
policies offer a build-up of equity within the policy with
significant tax advantages in that build-up
- Universal Life:
This is a flexible combination of Term and Whole Life. It has many
of the features and minimal premiums of a term policy, and yet
offers flexibility to increase those premium payments and
accumulate equity using some of the features and advantages of a
whole life policy.
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When should I buy
life insurance?....
A question for which there’s no exact answer! At a minimum, most
people would like to leave enough money to provide for the cost of
their funeral. Aside from that, many people feel they don't need
life insurance unless and until they have surviving dependants,
debts or other liabilities to be paid off, or other needs to provide
funds after their death.
As one’s lifestyle changes and evolves, the need for life
insurance also changes. Each lifestyle change brings a potential
need for more or less life insurance, and therefore, ideally, the
coverage should be reviewed at every such point of change. Most
financial consultants recommend a regular and frequent review of
life insurance as part of overall assets and liabilities.
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How much should I
buy?...
Again, there may not be an exact answer! If there’s a specific
amount is needed at your death - to pay off a mortgage or other
debt, to donate a defined lump sum to a charity, to fund college
fees, etc. - then the amount of life insurance you need may be quite
easy to calculate.
If the question is how much your survivors may need to live on after
your death, it becomes a harder question to answer. Some of the
factors which affect this calculation are: the age and number of
survivors; where they’ll live and the lifestyle they’ll need to
support; the rest of the estate you‘ll leave them; and various other
points you need to consider.
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Where should I buy
it?...
Until recently, you could only buy life insurance in your current
residence or in any other country where you had an active
connection, for example: employment or a residence from which you
actively conduct ‘lifestyle’ activities (such as holding a drivers
license, doing banking, and making credit card purchases).
That’s a legalistic way of saying that you could normally buy life
insurance only where you live now or in your Home Country if
you maintained a residence there, traveled there often enough to be
medically-examined there, and could provide financial references and
other underwriting requirements there, if necessary.
For expats of the US, Canada, and the UK, this was significant
since premium rates for life insurance in those countries have
dropped quite dramatically compared to the rest of the world, due in
part to advances in life expectancy and the liberalization of
various statutory requirements for life insurance companies.
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Has that
changed?...
In the past few years, with the advances in communications and
purchasing insurance over the web, international life insurance
has become an easily-available commodity.
Now an applicant, regardless of his citizenship or residence, can
purchase life insurance from a variety of sources and still handle
the underwriting requirements. For U.S. citizens there are also
circumstances under which you can purchase a U.S. "domestic" policy,
even though you live outside the U.S.
These international policies have many advantages, including
benefits and premiums payable in US dollars or other stable
currencies; medical (and other) exams conducted where you live;
payment of death benefits wherever you or your beneficiary(ies)
designate; and payment of premiums by wire transfer, cheque or
credit card.
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So what should I be
looking out for now?...
These advantages are somewhat offset by the risks of buying
international life insurance. In the US, Canada, and the UK, there
are regulatory authorities that exercise a supervisory role over the
activities of the insurance companies within their jurisdiction.
There are also rating agencies which provide ratings of insurance
companies.
In the international arena, there are many reputable and
world-renown insurance companies and there are also many small
companies operating on the fringes of the insurance world. You need
to be aware of the ownership and financial standing of any insurance
company that makes a proposal to you.
On the other hand, you shouldn't have to pay inflated premium
rates because of an insurance company’s pedigree! There are
international insurance companies which offer premiums and policies
based on US policy designs, US mortality rates, and US premium
tables, and which are owned and guaranteed by major US insurance
companies.
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Are there any
tax consequences to International Life Insurance?...
Any life insurance policy which offers asset accumulation may create
tax consequences for its owner. These consequences may be positive
or negative and therefore need careful planning and analysis.
If structured correctly, international life insurance can provide
the purchaser with many advantages which may typically not be
available to the purchaser of a domestic life insurance policy, such
as reduced administrative costs and the greater ability of the owner
to manage the investments into which the assets of the policy are
placed.
(The topic is further addressed in The use of
international life insurance in tax planning.
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OK, what’s the bottom
line?...
In summary - life insurance is for the living, not the dead!
By and large, you don't need it - your survivors do. Those
who depend on you or will be left with a burden when you die are the
ones who might need the life insurance on your life. And, ideally,
it should be a part of an overall financial plan which takes into
account all of your other assets and liabilities. Remember it’s
you who has to make the final decision to buy it - while you can.
This quick look at Life insurance is to
remind you, once again, that there are no bargains out there. You
should always use the services of an experienced international
insurance consultant to assist you in selecting a policy.
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The Innovative Benefits Consultants
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Phone or Fax: +1 (215) 243-7311
Email:
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