ARTICLES  &  REVIEWS

Life Insurance

London Free Press

As technology increases, the ability to open new opportunities increases for everyone. One area of opportunity is renewable term life insurance. As recently as five years ago, an applicant received a stipulated price if they were in good health, and if their health was not good, they would receive a rating or their application would be declined. More recently, we have witnessed the introduction of preferred underwriting which has resulted in price wars between life insurers.

 

The new way of helping people reduce their premiums is a revolution in term insurance pricing. It was only half a century ago that insurers segmented pricing between male and female, realizing that females did live longer. In the mid eighties, a second segmentation took place between smoking and non-smoking pricing. Again, realizing that there is a tremendous difference in life expectancy between those that smoked and those that did not. The current third wave is called "preferred underwriting" and it allows people to be underwritten based on their life style, their exercise, their weight, their family history and other components. Underwriters are now looking at normal history, cholesterol levels and driving records and this would now have quite an impact on the applicant's premium.

 

The fourth wave of the future will be genetic testing. This may give the underwriters the ability to anti select and also provide more information about our own future health than we want to know.

 

In the same way that many commodities have reduced in price over the last five to ten years, term insurance can generally be bought at a lower price now even if the applicant is older and preferred underwriting can allow people additional savings on their premium. It is not uncommon to see the renewal premium of a ten-year term policy rise much more than the cost of purchasing new life insurance midway through the ten-year term. Although the life insurance industry, particularly Head Office, does not enjoy re-writing life insurance policies midway through a term this often amounts to more savings for the client. One needs to be cautious when changing a policy because they do reinstitute a suicide clause and a contestability clause in the policy for two years. Replacing a policy should be taken in the aspect of being cautious of those two components. When you are reviewing your life insurance needs keep in mind that this insurance is going to replace your ability to earn income in the event of an untimely death. Over the last five years, there may have been increases in income and family situations may have changed, resulting in different needs for your coverage.

 

Certainly one size does not fit all but consider this example: If you earn $50,000 and you would like to replace three-quarters of that to your family on an ongoing basis a lump sum of $700,000 earning six per cent would provide $42,000 per year of steady income without the principal being reduced over time. Many people rely on the group life insurance provided by their employer but that insurance often only remains in force if you stay employed. The options to convert the policy if you leave are often prohibitively expensive. Similarly mortgage life insurance, which is linked to your mortgage, is structured on a declining basis even though the insurance premium is not declining.

 

Another interesting aspect of life insurance is an option called accidental death and dismemberment (AD&D Insurance). You need to determine if this is the best place for you to spend your money. This coverage can be purchased for a small percentage, which may seem like a good deal, but mortality data from 1999 show that few claims are as a result of accident and one has to question why the death benefit would need to be greater in the event of an accidental death as opposed to a natural death. As Andrew Rickard, who works with GP Capital Management and is Managing Editor of the Canadian Journal of Life Insurance and Financial Services, points out: "the fact of the matter is that accidental death and dismemberment insurance has about as much to do with financial security as buying a lottery ticket and should not even appear on the product line up of any self-respecting insurer". Whatever the case, financial marketers have never missed an opportunity to use the irrational appeal of the AD&D to haul in more insurance premiums.

 

Overall, the competitive decline in term premiums allows you, the consumer, an opportunity to revisit your coverage needs. Make sure that your coverage is adequate and perhaps allows you to reduce your premiums to replace the breadwinner's income.

 

Term insurance is an excellent coverage for temporary needs. In future articles we will discuss various forms of permanent life insurance.