Life Insurance Funding Options In Alberta
When buying life insurance, there are basically two types of insurance products, Term life insurance and Permanent life insurance. Term insurance offers temporary risk protection for a very affordable price, especially in the early years of the term. Permanent insurance offers lifetime coverage, usually for a fixed or declining cost. One of the most popular types of permanent coverage is universal life insurance.
In this article we will look at 4 distinct types of life insurance, all for the same person, and see how well they perform from a pure cost perspective over 40 years. Our fictitious person will be John Doe, an average Alberta man age 35, non-smoker, is normal health (i.e. standard insurance rates). John wants to buy $500,000 of life insurance and keep that amount for the rest of his life.
Term 10 Life Insurance
A term 10 policy, or T10, will be the lowest initial cost for insurance. The first 10 year term will be very inexpensive, but after each 10 year period the costs will begin to step up. The owner of the policy has the guaranteed right of renewal, meaning they can keep their insurance policy when it renews, if they are willing to pay the increased premium, and do not have to re-qualify medically for their insurance policy.
For John Doe we have found that currently BMO Insurance is the most competitive insurance company. The first 10 year term with BMO Insurance will only cost him only $290 per year. The second term will increase to $1,980, followed by $4,475 per year for the third term, and the final 10 years will be a whopping $11,740 per year (from age 65 to 75).
This is a total premium investment of $184,850 over 40 years.
Term 20 Life Insurance
A term 20 policy, or T20, is a good option for people looking for a stable premium for a good long time. Twenty years is usually long enough for the cost of raising children (however the costs of children never really goes away), or to pay off or at least pay down a mortgage and other long-term obligations. After 20 years a persons financial risks have decreased, and maybe they do not need the insurance any more. But what if they did?
Over a 40 year time period, a Term 20 life insurance policy will renew once. That renewal will be very steep, as the insurance company has to capture the increased risk for the next 20 years: a critical time when it is much more likely the client will die. For our John Doe, this is what it looks like. Canada Life is the most competitive insurance company, with the initial term costing only $475 per year. The second 20 year term renews at $6,200 per year (over 13 times the initial premium).
This is a total investment of $133,500 over 40 years.
Term 100 Life Insurance
There is a simplified life insurance option for people called Term 100. A Term 100 policy offers a locked-in, level premium for the rest of your life with no increases. This life insurance policy is simple, and has no cash values attached or any equity building up in it. Basically, you pay a set level premium for life, and when you die the entire death benefit is paid out to your beneficiaries. Plain and simple.
For our client, John Doe, his annual Term 100 premium from RBC Insurance would be $2,085. Over 40 years this would be $83,400 in total premium spent.
Universal Life 20 Pay Option
Our final comparison is a Universal Life policy with a guaranteed 20 pay option. This means the cost for the life insurance is paid up in 20 years, guaranteed. The insurance company asks you to pay a higher premium than a normal universal life insurance policy, but guarantees that the policy will be finished its annual or monthly payments quickly. These types of guaranteed paid-up life insurance policies are usually offered in 10, 15 or 20 years options. The faster you pay it up the higher your annual premium, but the lower your total investment.
For John Doe, the most competitive policy is being offered by Manulife Financial, called a LifeWise 20. This plan will have a cash value accumulated inside of it that will become very substantial over time, but is beyond the scope of this article. Let us just purely look at the annual cost as a total investment to generate $500,000 of life insurance death benefit. John will have to pay $3,465 per year for 20 years. After that time he no longer has to pay any premium, and the $500,000 of life insurance benefit is paid up for the rest of his life.
John would have to spend $69,300 for the 20 year quick pay universal life insurance policy. As an internal rate of return over 44 years (the life expectancy of John Doe), an alternative investment would have to generate 9.68% annual interest compounded to grow $3,465 invested over 20 years into $500,000. And that does not account for taxation eroding the investment returns or the ultimate cash accumulated at death.
by: Mitch Reynolds