of Life and Insurance

As I began to feel the need for a life insurance, I began to wonder if there were very many insurance options available to me. My idea about insurance policy at this point in time is at its most elementary level. It goes something like this, “One signs up a policy contract for a certain face value, at certain premium for a lifetime of the life-insured. And when the life-insured passes on, the beneficiary receives the benefits.” With this level of knowledge on the subject I did not feel confident to contact an agent. So I decide to poke around, do some research before I sign up a contract. With that in mind, one evening, I picked up a few books on insurance from my neighborhood library. To be honest, the stuff made a boring read. I found it difficult to plough through the thick and thin chapters of the book, especially for a person such as myself who do not have any prior knowledge of the industry. But then who would expect that from a book about life insurance? Anything important is intrinsically boring, I believe. Anyway, as the onus being on me, I kept going at it and finally managed to extract some information about life insurance.
First thing I noticed was the advice that anyone considering buying a life insurance policy should request for a Guide to Buying Life Insurance, a booklet produced by the regulatory body of the industry. For Canadians, that body is known as Canadian Life and Health Insurance Association or CLHIA in short. The idea is to familiarize oneself with industry so that one can ask questions and understand what the agent is talking about to help make an informed decision. It seems to me that insurance industry has designed quite a few types of life policies to suit the taste buds of consumers of such financial products. I found that while my rudimentary understanding of life insurance policy still holds good, there are several variations on the theme.

Term Insurance: It is the least expensive way of getting insurance coverage. As the name indicates, the period of coverage could be anywhere from 1 to 100 year term. It is cheaper to buy this type of insurance product because it does not have what is called Cash Surrender Value (CSV). I will describe what CSV is in the Whole Life section. While buying limited term insurance policy, one might think about adding renewal and conversion options. Having these options is beneficial in case one decides to continue the same policy or convert into another type at the end of the initial term. During conversion or renewal, premium will be most likely higher than the one you have been paying. To note, if it is not term-to-100, this type of policy covers only a limited period.
Whole Life Insurance: Whole Life is more expensive than term policy. It has something called Cash Surrender Value. In the initial phase of the policy, it seems, one pays more than the actual cost of insurance resulting in the build-up of extra cash. This accumulated cash is paid out to the policy owner when the policy is terminated prematurely; therefore the name cash surrender value. At death, CSV forms part of the face value of the contract. It is not paid out separately. There are quite a few things one can do with it. One can borrow from the insurance company against CSV. Interest rate fixed by the company will have to be paid though. Also, in the event that premium payment is delayed due to whatever reasons, the accumulated cash can be used to keep the policy in force. Again, this is essentially in the form of policy loan and will have to be paid back to the company with interest. Otherwise, it will affect the amount of benefits received at death. There are myriads other options and riders that can be added to a basic policy to suit anybody’s insurance need. An in-depth discussion with the agent should thrash out those needs.
Universal Life: This is the most expensive policy to own and its features are very flexible. This one requires an in-depth look and I will do that in my next post. Till then, happy reading!