by Paul Wolf, IBC
Life Insurance is somewhat like writing a will - we think about it or talk
about it every so often, but few of us actually do anything about it!
What are the major uses of personal Life Insurance?
1. Take financial care of your survivors, once you’re no
longer there to do it; and to take the burden of worying about the financial
aspects of your death off their shoulders;
2. Pay off any outstanding debts - a mortgage, other
loans, credit card balances, etc;
3. 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 fiull in for lost income, get the
special treatment you want, spend quality time with your family, etc;
4. Pay estate taxes and other settlement costs - wherever
they have to be paid;
5. Provide educational funds for your children or
6. Supplement your retirement income - life insurance can
often accumulate tax-sheltered funds within the policy;
7. Charitable donations - life insurance can be used to
make a donation to your favourite charity.
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. In the
short term it offers the lowest cost, but 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
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. Many whole life policies
offer a build-up of equity within the policy with tax advantages in that
Universal Life: this is a flexible combination of Term and Whole
Life. It has many of the features and minimum 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.
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.
How much should I buy?
Again, there may not be an exact answer! If there’s a need for a specific
amount of money at your death - for example, 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, however, the question is how much your survivors may need to live on
after your death, it becomes a harder question to answer. Obviously some
factors which impact 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 factors to be considered.
There are several formulas/programs which ask you a bunch of questions and
then help you compute the amount of life insurance you should have.
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, such as
employment or a residence from which you actively conduct ‘lifestyle’
activities (e.g. holding a drivers license, doing banking, and making credit
card purchases). That’s a long-winded 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
In the past few years, with the rapid advances in communications and
purchasing via 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.
These international policies offer 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.
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, conversely, there are many small companies
operating in the gray areas of the insurance world.
You therefore need to be aware of the ownership and financial standing of
any insurance company that makes a proposal to you. But, you don't have to
pay inflated premium rates because of an insurance company’s pedigree! There
are, for example, 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.
So, 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 people 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
Paul Wolf is president of Innovative Benefits Consultants. He can be
contacted at: firstname.lastname@example.org
- or by phone or fax at:
+1 (215) 243-7311