What type of insurance can you buy

What type of insurance can you buy?

There are two types of life insurance: permanent and term. They are two different types of protection that satisfy many different life insurance needs. Term may be all the life insurance you’ll ever need, or it may be used as an interim step before purchasing permanent insurance. Possibly, a combination of term and permanent in the same policy may be the best solution for you. Washburn Financial can show you the strengths of each and their differences.

Permanent life insurance

Permanent life insurance - as the name implies - protects you for your lifetime. It can build cash surrender values and provide a death benefit. Some permanent policies pay policyowner dividends (participating or par), and others don’t (nonparticipating). If the permanent policy you are considering has a cash surrender value, you should review the product guide provided by the insurance company to better understand how the assets backing the policy are managed and how these assets are used to accumulate value within the policy.

Universal life: Universal life provides permanent life insurance with a tax-advantaged investment component. As cash values accumulate, they can be used to pay part or all of the cost of your insurance or to increase the death benefit. You select an investment mix that is as individual as you are - taking into account the amount of investment risk you are comfortable with, and your financial goals and circumstances. This type of policy is generally non-participating and is attractive for people who want to actively manage their life insurance policy.
Permanent participating insurance: Permanent participating insurance policies have potential for earning policyowner dividends. Favourable investment returns, mortality and expense experience generate earnings in the par account - a portion of which can then be paid to policyowners in the form of dividends.

You choose how you want your dividends to be used. The most popular dividend options are either to use dividends to buy additional permanent coverage each year or to buy a combination of term and permanent insurance, which can make a larger amount of coverage more affordable. The first option provides an increasing death benefit that can offset the effect of inflation over the longer term. Higher premium options generally provide higher long-term growth (i.e. paying a high premium may mean you will receive higher values over the longer term). The insurance company manages the investment portion of a participating policy, so it doesn’t require hands-on management by the policyowner. Assets in the participating account are managed in a diversified portfolio and are invested primarily in bonds, mortgages, equities and real estate.

Term life insurance

Term life insurance is well suited to meeting high, short-term protection needs for the lowest initial cost. For example, a couple with young children and/or a mortgage might select term insurance as an affordable way to obtain the full coverage they need today. Many term insurance plans do a good job of meeting immediate needs and provide the freedom to later move, or convert to a permanent product without providing proof of health. However, this ability to convert to permanent insurance often expires around age 65 or 70. When purchasing term insurance, it’s important to understand what conversion options you have. Some companies impose significant restrictions or have a very limited choice of permanent plans for conversion.

Many term plans are renewable after five, 10 or 20 years without providing proof of health. The price will increase to be appropriate for your age at renewal, and the increase in premium can become substantial in later years. Coverage ceases for the majority of term contracts once you reach the age of 75 or 80.
When reflecting on the cost of term insurance, be sure to consider the following factors impacting your total cost:

	the initial premium,
	the renewal rate and whether evidence of insurability is required at time of renewal,
	how long you’ll need the protection, and
	how much flexibility you want in case your needs change in the future.

A combination of permanent and term life in one policy

Many people have both short - and long-term insurance needs and require varying amounts of coverage over different periods of time. A combination of permanent and term life insurance features can be available in one policy. Most permanent policies allow for the addition of low-cost term coverage without an additional policy fee. This provides a way to obtain the right amount of coverage at a more economical price, giving you a base of permanent coverage that won’t increase in cost.

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