The most basic form of insurance and the simplest to understand is Renewable and Convertible Term Insurance. Coverage is provided for a specified term, the policy renews automatically at the end each term period until the policy expires, most commonly at age 85. This plan has the lowest initial cost at entry, but don’t be mesmerized by the low cost because on renewal you will pay a substantial increase. If, however, you become uninsurable before the end of the term period you will have no other option but to renew or convert it to a permanent plan if you want to keep the coverage.
Most companies offer a 10 year and 20 year renewable term policy. So how do you decide which one is right for you? If you have a young family you probably would wish to cover the acute dependency period until the children are out of school (including post secondary) as a minimum. If you have a mortgage, you would want to insure it for an appropriate amount while it is outstanding. Remember the average Canadian purchases more than one home during his or her lifetime, so there usually is some outstanding mortgage over future years. Specific needs such as other debts, education funds, etc. will have a time frame that they should be insured until your assets increase to a point where insurance might be no longer required.
In other words, the longer the need will persist, the longer the term of the coverage should be to insure it. Some needs will persist for your entire life (estate liquidity, taxes at death) and those can be provided for by Term to age 100, Whole Life, or any other permanent life insurance plan. The rest can be covered by a combination of 10 year or 20 year term, below are some key points for consideration:
- If it can be avoided, never let term insurance policies renew. If you can pass a medical, do so and rewrite the policy for considerable savings over the renewal premium. The optimum time to do this is a year before the current policy renews;
- Try to match your need with the length of term coverage. If you are going to need a significant amount of coverage beyond 10 years use 20 year term or permanent;
- If you and your spouse require term insurance to cover a mortgage, consider using joint first to die coverage to save money. This type of policy will insure you both for the amount of the mortgage and will pay out when either one of you dies;
- Make sure the company you are using for your term insurance has good, competitive permanent life products that you can convert to without a medical for situations where your temporary need for coverage becomes permanent.
Programming the proper amount of coverage and the proper term period can be a confusing exercise. Done properly it could save you considerable premium dollars over your life time while providing your beneficiaries with financial security. Call me if you think you might benefit from a review of your current coverage.