Young professionals spend years (and a significant amount of finances) learning and training to excel in their chosen careers. Whether as an employee or the business owner, their initial focus is on building and expanding their client base. A lot of factors determine their ultimate success but one factor in particular is paramount. That is the health and well-being of the professional and their ability to work.
Most young professionals are so highly focused on the aspects of their careers that will produce them income that little thought is given to what would happen to that career if they were unable to work either through accident, sickness or death.
Life, disability and critical illness insurance can be valuable tools to ensure that these young professionals, their businesses and their families are protected from these unforeseen events.
Life insurance serves two basic purposes for young professional – debt reduction and income replacement. It is important to ensure that their families are left debt-free and in a position where they are financially secure. In later years, as they acquire wealth and pay off debt, the need for life insurance shifts to tax, estate and succession planning.
There are several types of life insurance policies. These include Term, Term to 100, Whole Life and Universal Life.
Term insurance is a contract that specifies that, in exchange for an annual premium, the life insurance company promises to pay a death benefit if the life insured dies within the fixed term of the contract. Term insurance contracts are generally renewable to age 80 and convertible to permanent life insurance to age 65. Term insurance is the most cost effective way to cover short term (25 years or less) insurance needs such as loans and mortgages.
Term-100 (T-100) life insurance provides coverage for the entire lifetime of the life insured with a level premium. A basic Term-100 policy has no cash value and no non-forfeiture options. The premium must be paid when due or the policy terminates within 30 days.
Whole life insurance provides coverage for the lifetime of the insured, with a premium that typically remains level over the duration of the contract. Some whole life policies, however, will allow you to prepay them in as little as 10 years. A whole life policy builds a cash surrender value (CSV) over time and if the policy holder surrenders the policy prior to the death of the life insured, they may be entitled to receive payment of that CSV, less any surrender charges, if applicable. Those values can also be borrowed directly from the policy or leveraged to invest or enhance retirement income.
Universal life (UL) insurance also provides coverage for the entire lifetime of the life insured, but it also includes a savings component that is created through the deposit of “voluntary” excess premiums. Within certain limits, the policy holder can use a UL policy to accumulate savings that are sheltered from taxation during their lifetime. On death, the savings portion is paid out to your beneficiaries as an additional death benefit. The savings portion is available for withdrawal at any time but would be subject to tax at that time. The cash values in the policy can also be borrowed directly or leveraged as with Whole Life.
Lender’s insurance vs personal insurance.
Generally speaking, life insurance sold by a financial institution on any type of loan or mortgage, is Term life insurance. When a lender sells life insurance, they are selling a “decreasing” term life insurance policy for the duration (term) of your loan. If you die, the insurance pays the balance owing at the time of death.
Insurance sold by financial institutions is owned by the financial institutions. You have no rights with respect to the coverage. The policy is not transferable, it is not renewable and it is not convertible. Conversely, premiums for these policies are generally higher because little or no medical underwriting questions are asked.
Personal life insurance can be used as an alternative. Your policy can be “collaterally assigned” to your lender to protect their interests. You own your policy and it is fully transferable from loan to loan. Medical evidence is required which ultimately reduces the risk to the insurance company. This allows them to sell the policies at reduced rates to those who qualify. If you are in above average health, the rate for term life insurance could be reduced a further 30%.
Disability insurance provides financial protection to working individuals who become injured or ill and unable to work. Benefits paid to or on behalf of the qualifying insured individuals range from income replacement to paying monthly mortgage, loan, and credit card payments on behalf of the disabled. Many young professionals have access to disability coverage through employer sponsored group insurance plans or association plans. These plans can be restrictive and may not provide the comprehensive benefits and coverage available to them that a privately owned plan might offer. In many cases, a combination of the two plans may be the best option.
Critical illness policies are designed to provide a tax-free lump sum of money to assist an insured in adapting to their changed circumstances caused by a life-threatening illness. In order to qualify for benefits, the insured must survive a waiting period from the onset of the critical illness (typically 30 days). The proceeds are tax-free. The money can be used in any way you so choose. Including such things as:
- Reduce debt and other financial concerns.
- Allow your spouse to take time off work to care for you or alternatively pay the cost of providing in home health care.
- Allow for out of province or out of country health care treatments not covered by private or government medical plans.
- Provide funds for a vacation.
- Fly in family members that could not otherwise afford to do so.