Changing your car and home insurance company is easy. Life insurance is different because changes in your health could make new coverage expensive or unavailable. Since premiums are based on your age, new coverage costs more if you’re older. You may own your life insurance for decades and that’s why guarantees are important. Luckily, guarantees are easy to find if you select the right product from the right insurance company.
Guarantees aren’t expensive. The big cost is thinking you need more protection than you do.
The components of life insurance
Your life insurance premiums have four main components: mortality rates, expenses, investment returns, and taxes.
Mortality rates have been improving over time and many products guarantee them.
- Sales costs such as advertising and compensation;
- Costs of issuing policies, such as paramedical examinations and underwriting; and
- Ongoing administration costs such as sending you statements, processing your requests for changes, and meeting government reporting requirements.
Investment returns affect your premiums and are rarely guaranteed. The insurance company invests a portion of each of your payments to cover future claims. This is especially important for permanent life insurance with guaranteed level insurance charges. Examples are term to 100 and some universal life plans.
And there are two main taxes:
- The premium tax, which varies by province/territory and can change at any time; and
- The investment income tax (IIT), which is paid by insurers and those costs are passed on to policyholders.
The guarantees vary depending on the type of life insurance:
With term life insurance, the entire premium is generally guaranteed, including premium tax rates. Competition keeps prices low and puts pressure on companies to be efficient.
Universal life insurance
With universal life insurance, the mortality rates and expenses are typically guaranteed but taxes and investment returns rarely are. Some investment options may have minimum guaranteed returns or maximum investment loads.
Whole life insurance tends to have the fewest guarantees. You’re generally liable for increases in mortality rates, increases in expenses, decreases in investment returns, and increases in taxes.
Guarantees are rare if you buy life insurance from your employer’s group benefit plan, an association to which you belong, and your mortgage lender.
The bottom line
If guarantees are important to you, you can usually find them. That gives you more peace of mind. Before buying, you should ask what could cause your premiums to change and then check that the policy contract is consistent.
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