Last summer, we published a blog post on the Top 5 Life Insurance Q&A. We explored such questions as:
- How much life insurance is enough?
- I have life insurance through my plan at work – is that good enough?
- Do I have to get medical testing?
- How much does it cost?
- Is it tax-free?
Those are very important questions indeed. However, since then, we’ve gotten quite a few more inquiries and additional questions about life insurance. So while we can’t call this our top 5, as that spot has been taken, let’s take a look at our next 3 questions and answers about life insurance.
1. Who should be my beneficiary?
At the highest level, there are 2 choices – you can designate either your estate as beneficiary, or you can designate a named beneficiary. A named beneficiary could be an individual, multiple individuals, a registered charity, a religious or educational institution, etc. In the case of multiple individuals, for example, a parent could name 2 adult children as beneficiaries, each to receive 50% (or some other split) of the proceeds.
When the benefits of a life insurance policy are payable to your estate, this means that the proceeds form a part of your estate, and are therefore governed by your will. That is, the bequests in your will determine how the life insurance proceeds, and your other assets, are distributed. However, there are some risks to this strategy, and several reasons why you might not want to name your estate as beneficiary. In particular, when there is a named beneficiary on a life insurance policy, the proceeds will flow directly to that named beneficiary and will not be included in your estate. This offers 3 key advantages:
The assets pass outside your estate, thereby ensuring your intended heirs, family, and loved ones receive the proceeds without unnecessary delay.
Assets in your estate are generally exposed to financial claims from individuals and organizations, but a named beneficiary ensures the life insurance proceeds are protected against claims from these potential creditors.
Minimize Probate Fees
Life insurance proceeds payable to a named beneficiary are not subject to probate fees, which helps save money and preserves the value of your estate. For more information on this topic, please see our previous post on Beneficiary Designations.
2. Should I buy Term or Permanent life insurance?
It depends. Neither term nor permanent life insurance is universally better in all situations, but there are some important advantages and disadvantages to both.
Term Life Insurance
- Cheap – The most affordable option
- Term can be extended / re-purchased
- Rates increase considerably with age
- Typically not offered past age 60 or 70
Permanent Life Insurance
- Never expires
- Option to select level premium for life
- Costly – more expensive in early years
- Can be complex and difficult to understand
So how can you decide which one is best for you? Your own unique personal situation will help you determine which type of policy is best suited to your needs.
For example, if you’re a single parent with a young child, and want to make sure that your child is properly cared for in the event of your death, a term policy might be better. This is because the risk itself is temporary – eventually your child will be a self-sufficient adult, and so the risk of raising the child and helping pay for postsecondary education is a temporary risk. In this case, a policy such as a Term 20 life insurance policy might be the best protection, because it is designed to offer affordable protection only for a 20 year period.
On the other hand, if you’re planning to leave a legacy to your favourite charity upon your death, a permanent policy may be the better option. As you can see in this case, the insurance isn’t intended to address a temporary risk, but rather to help fulfil an estate planning objective. Hence, a term product that will eventually expire would likely not be the best option, and a permanent plan would likely be the superior choice.
For a more detailed discussion on this topic, please see our previous blog post on Term vs. Permanent life insurance.
3. What if I say I’m not a smoker, but I really am – How would they know?
Smoking status is a major factor in determining life insurance premiums. In fact, smoker rates are often double or triple the equivalent non-smoker rates. It’s no surprise then, that some people may be tempted to indicate non-smoker status to obtain the cheaper insurance rates. In short, don’t do it. In fact, don’t even think about it.
Lying about your smoking status on an insurance application is known as fraudulent misrepresentation. Fraudulent misrepresentation occurs when you intentionally provide false information, with the intention to purposely mislead or deceive the insurance company. In general, this is done in the hopes that the company will issue a policy to someone who otherwise wouldn’t qualify, or to issue it at a lower premium to someone who would qualify.
Not every insurance company uses the exact same definition of what it means to be a smoker. Typically, the question is some variation of: “Have you ever used any tobacco products within the last 12 months” or something similar. However, now that we have legal marijuana, vaping, e-cigarettes, and otherwise, many insurance companies have expanded the definitions of smoking, so it’s important to pay very close attention to the wording of the question, and answer honestly.
Insurance companies generally assume that the information you provide on the application is the truth, and they then use this information to assess your insurability and determine what premium to charge. If the life insurance company discovers you were in fact a smoker (as per the definition in the policy application) and indicated non-smoker status in your application, they can void the policy leaving you uninsured. Worse, if they discover the fraud after your death, they can deny the claim. This could have disastrous for your family, surviving spouse, partner, or children, who were relying on those insurance benefits.
How much life insurance coverage do you need? And what type of insurance plan is the best way to protect yourself and your family? We can help you figure that out. Contact us today to have a discussion with an insurance specialist.