Peter Boys, Boys Financial Services

Tips and Traps with Life Insurance

life insurance

Tip: For many Canadians, life insurance is an important part of a sound financial plan. A life insurance policy is a legal contract between you and the life insurance company. While price may be important, understanding the actual terms and conditions of the contract are of the utmost importance.

Tip: In simple terms, you agree to pay money in regular installments (the “premium”) and the insurance company agrees to pay a lump sum of money to your named beneficiaries if you die while the policy is in force. Just like any other contract, life insurance contracts have terms, conditions, limitations and exclusions. Some life insurance contracts are relatively simple whereas others are highly complex legal-financial documents.

Trap: Signing before you have carefully read and understand any application that claims to pay out cash to yourself or your lender if you were to pass away. Remember, the application forms part of the contract. Make sure that the application is fully and properly completed. “If in doubt check it out!” Don’t be afraid of asking questions and don’t be shy to elaborate on your answers to the application questions. A professional and knowledgeable life insurance agent will be more than happy to explain each and every item to you. Don’t take a comment such as “it’s not important” as an answer. Every item on the application is important and may affect your coverage. A fully and properly completed application will expedite issuance of the policy and will reduce the potential of difficulties later on.

Trap: Buying mortgage or loan insurance coverage from you lender. Most of these plans only cover the outstanding loan balance and expire once the debt is paid off. They pay out on the first death and then there’s no more coverage. Whereas a policy you own and control can cover two lives, pay off the mortgage debt, and still have coverage for the survivor, all for a little more cost than a lender plan. And remember, lender insurance protects the lender, not you.

Trap: Not understanding how term coverage increases in cost on each renewal date as premiums go up upon reaching the specified renewal dates. People who buy these plans file them away and forget about them, only to be shocked when the greatly increased monthly premium gets taken from their bank account. Consider longer terms such as 20 or 65 years to lock in your premiums for longer periods, or Term-Life plans that offer fixed premiums for life but don’t build any cash value.

Trap: Yearly renewable term (YRT) pricing that looks cheap to start with and builds cash value. But the ever-increasing cost of insurance eventually eats up any cash value, the premium becomes unaffordable and the policy ends up lapsing. In many cases people are unaware that this could happen as they were never given a policy projection based on the premium that they were paying.

If you have policies gathering dust in a filing cabinet, safe, or safety deposit box, you owe it to yourself to have it reviewed to ensure the coverage is adequate and that the cost still makes sense. Some people may have policies that they bought years ago from an agent that has since retired. These are called orphan policies. If this is your case you should have it checked out by a trusted life advisor.

 
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