Understanding Life Insurance
BEST LIFE INSURANCE COMPANY
Now you know how much, and the type. The next step is to choose a company to provide that coverage. Here’s some of the common considerations:
Premiums
Certainly you should shop on price. There’s a variety of online comparison sites where you can comparison shop premiums or your broker can provide you quotes. Recalling that the death benefit is the same for any policy, we should care quite a bit about premiums.
However, it’s less of a concern than it used to be. When I started in insurance in 1986, price differences amongst similar products ranged by as much as 250%. Today, most companies are very aggressively priced against their competition and you’d expect to find most companies to be within 5-10% of each other’s premiums. So while getting lower premiums is important, much of that work has been done for you already by the industry.
Company Size/Stability and Metrics
People tend to prefer things like company size, age of company, and sometimes, they want mutual companies. Again, these things tend to make little difference to your life insurance. The newest, smallest life insurance company has to follow the same regulations as the large companies, ensuring that age and size has little to do with ability to pay claims.
In addition, all companies belong to an assocation called Assuris. Assuris places minimum guarantees on all life insurance policies and is backed by the entire industry (all the companies). So if a company did fail just when they had to pay your death benefit, the entire industry (big and small companies) will collectively ensure that your claim is paid at least to the minimums dictated by Assuris. That’s your assurance that all the companies are basically insuring each other.
So, if you care about company size, you should consider this as part of your decision, but also be aware that it’s likely to make very little difference.
With respect to metrics, there are a number of metrics available – ratings and the like. However, the regulators require that all Canadian companies meet a minimum standard of metrics and other metrics are arguable at best as to how much they quantify the actual stability of a company.
If you are going to use this as a factor in your decision, be wary that you’re actually looking at the metrics and not marketing – because you’re seen the company name. One of the oldest and strongest life insurance companies in Canada is Foresters Financial, a company you may not have even heard of. Their roots go back to the 1400’s when membership was decided by dualing with cudgels (a practice unfortunately abandoned in 1843). Further, they are structured not as a stock for-profit insurance company so there’s less pressure to keep finances tight and pay money to shareholders – allowing them to retain more money in reserves than other companies. I’m not suggesting that you go with Foresters though they are a fine company, I am reminding you to make sure that you’re comparing companies on attributes and not marketing.
Policy attributes
For the most part, term policies are very similiar across companies. The same is true for guaranteed whole life and term to 100 cost of insurance universal life. There are however a few differences.
Renewable
Term policies have premiums that are level for the initial term. At the end of the first term, premiums increase and are again level for another term. So 10 year term has premiums that go up every 10 years. This continues until they expiry age of the policy at which point the policy ceases.
Years ago many term plans were renewable at the same premium that you would have received if you took a new medical exam. A new term 10 policy at age 30 had premiums based on passing a medical exam. Upon renewal, at age 40, your premiums were the same as someone who’d just passed a medical exam at age 40. it was beneficial to buy a short term policy and simply renew it – you always had the premiums as if you had just passed a medical.
But that changed in the 90’s. Purchase a term 10 at age 30, and at renewal at age 40 your premiums are no longer the same as someone who just passed a medical – they’re far higher. And that means that you do not normally want to take a term policy where you expect to keep it at renewal.
Instead, if you’re purchasing a term policy you should select a term that’s at least as long as you plan to keep the insurance. That locks in your healthy rates for the entire duration and removes the huge increases at renewal.
Conversion
Conversion on a term policy is the option for you to exchange your term insurance for a permanent policy without taking a medical exam. You should only purchase a term policy if it has conversion. It’s one of those features that you don’t care about until you do care – then it means everything. You can imagine that if you develop a life threatening condition near the end of your term policy that the ability to directly swap it for lifetime coverage, without a medical exam, AND get healthy rates, would be a very important feature. In addition, it’s also commonly used for convenience at the end of term simply to exchange the term coverage for a smaller permanent policy simply because no medical is required.
The other consideration for conversion is what the permanent policy looks like that you can convert to. Unfortunately, we don’t know what that will be – it’ll be whatever is available from that company in the future. However it’s common to look at what companies have had in the past or presently and use that as a guideline. If they have poor conversion options now, they may have poor conversion options later. If they have great conversion options in the past, we may expect them to continue to have that available.
Exchange
The exchange option is a mini-conversion available in the first 5 years of many term policies. Conversion allows you to exchange term to permanent. Exchange allows you to exchange term to a longer term. So you could purchase a term 10 policy, then in 5 years swap it for a term 20 without a medical exam. This is useful when trying to get coverage while deferring costs (such as would be the case with a smoker who’s trying to quite). You can purchase a less expensive term 10 now, then swap it for a term 20 within 5 years.
Summary – Selecting the Best life Insurance Company
In the end, you’ll likely depend on your insurance broker to recommend a company; and your broker will often recommend a company that they’re comfortable dealing with. However you should evaluate their recommendation based on the factors we discussed above; you should ensure that the premiums are competitive. If you care about company size and age, you should evaluate that. You should ensure a term policy has conversion, and if you’re purchasing a shorter term, ensure that the policy has exchange. If you’re purchasing whole life or Universal Life, you should again compare premiums to competitors, and perhaps to a lesser extend compare guaranteed future cash values to higher premiums (life companies often focus their whole life either on lower premiums or higher cash values; by default you should look at the lower premiums).
In the end, the life insurance market is very competitive in Canada (as I noted above, it didn’t use to be). That means that getting the correct type of life insurance is far more important than selecting the ‘right’ company. Make sure you’ve got the correct type, and almost any company in Canada will provide a decent insurance policy.