A Case for Insurance
One of the most common oppositions to buying insurance is understanding the need, and making the issue a priority. As a Charted Life Underwriter, I try to help clients navigate through the difficult and confusing world of protection versus investment. I will outline the types of insurance available and the factors to consider. Whether the insurance is for debt coverage of a mortgage or long term care for your older years, each product has a specific purpose and should be analyzed for its specific value.
Insurance will not only protect a person, but it can also provide a healthy return on investment.
Term to 100 Insurance
This type of insurance has a 100% guarantee to pay out to your beneficiaries at some point, as death is certain.
Important things to remember about these types of policies:
1) If a client dies prematurely, no other investment will provide his or her family with a higher after-tax return than this type of policy.
2) If he or she dies before the age of 80, the investment in this policy will pay the net of 6.5% to 13%. To get the same type of return from a guaranteed investment (assuming a top marginal tax bracket of approximately 45%) the client would have to net between 12% to 26% per year on a pre-taxes basis. This yield is not realistic.
3) Even if the insured was to live to the age of 100, he or she will still receive a return of 2.74%, comparable to a pre-tax rate of 5% and similar to what you would expect to yield in the long run if investing with in five year GICs.
Here are the downsides to an investment in a life insurance policy:
- It is illiquid
- You have to die in order to cash in on it
- It doesn't you directly, but does take care of your loved ones
- If you cancel your policy you won't get your money back
Of course, these negatives are irrelevant if your goal is to protect the loved ones you leave behind.
This type of policy is good for specific purposes such as mortgage insurance, protection for a child, and spousal support. It is not as expensive some of the permanent policies. However, it does expire and will not pay if the insured does not die during the protection period.
Unlike life insurance, critical illness insurance protects you against a possible event, not a certain one. This mean that the returns are only possible and not guaranteed (unless you purchase a return of premium policy.)
The probability of a critical illness occurring prior to age 75 is significantly greater than death. In fact, the probability sits just below 50%. So if someone offered you insurance for your income or your investments, would you consider it? Critical illness insurance is a living benefit that provides a lump sum payment should you find yourself in a situation that is covered. The payment is then for whatever you want to use it for.
Since we don't have the benefit of certainty, the insurance option again proves to be the best solution.
This type of insurance is a little more complicated in terms of deciding on what you need, what you can afford, and what you are willing to pay. In many cases, critical illness insurance has replaced disability insurance because it is more clear cut as to what is covered and when. With most disability insurances you must constantly provide proof that you are disabled. Having said that, there are some instances where it is very important to consider this type of coverage. Business owners have the greatest need.
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