How much do you know?
When purchasing a life insurance policy, is it mandatory to undergo a medical exam?
CORRECT ANSWER: SOMETIMES.
Many life insurance policies do require a medical exam; however, some do not. The insurance company may require you to get one to assess your health and the risk you pose to the company. If no medical exam is required, the coverage may be limited, or the premium may be higher.
You may have life insurance coverage through your employer. This is called Group Life Insurance. If you do not, you can purchase life insurance individually through a licensed life insurance agent or directly from a licensed life insurance company. This is called Individual Life Insurance.
Group Life Insurance
If you receive life insurance through your workplace, it is group insurance. Group insurance is usually available up to age 65, and, if you belong to a large group, it does not require a medical or other proof of insurability. Group life insurance is issued to employees under a master contract and individuals receive a certificate as evidence of coverage. The premium charged is not personalized according to your age, sex or health, but is based on the averages of the whole group.
Your employer’s group insurance probably has some limitations of which you should be aware:
- Coverage is usually a basic amount and may be a multiple of your annual salary e.g., two times your annual salary, three times your annual salary, etc. If you wish to have greater coverage, you may have the option to purchase more through your employer’s plan, or you may want to purchase your own individual life insurance.
- Coverage usually terminates when you leave your job. Some policies allow you to convert the coverage to an individual life insurance policy. Check your group insurance to see if this is an option.
Individual Life Insurance
Policies generally fall into two categories: permanent and term. Permanent life insurance is typically used to cover needs that will always be there such as funeral expenses or supplemental income for your survivors. Term life insurance is suitable for more temporary needs or expenses that have a foreseeable end like your mortgage or putting your children through university.
A licensed life insurance company or agent can help you find the most suitable life insurance policy for you. Visit FSCO’s Agents Licensed in Ontario or Licensed Insurance Companies in Ontario database.
You can often purchase a combination of policies to suit your individual needs. Your life insurance company or agent can help you find the right balance.
Permanent Life Insurance
The basic features of permanent policies are:
- level premiums: most policies have premiums that remain level over the lifetime of the policy. This doesn’t mean that the payments remain the same. It means that the premiums you pay in the early years of the policy when you are younger are higher than the risk you represent to the insurer, and when you are older the premiums you pay are lower than the risk you represent.
- cash values: the amount of money that builds up in a permanent life insurance policy. You can use the cash value to boost your death benefit, pay your premiums, supplement your retirement income, or take out a policy loan.
- participating policy dividends: participating policies share in the financial experience of the insurance company and receive annual dividends. Non-participating policies do not.
- non-forfeiture options: these are options available to you if you miss or decide to discontinue paying premiums on your policy. The options will allow you to keep the policy in force or take a cash settlement.
For more information about the basic features of permanent policies, review the Canadian Life and Health Insurance Association’s A Guide to Life Insurance brochure.
Every permanent insurance policy is designed to provide you with coverage for your whole life. However, some are sensitive to interest-rate and/or stock market fluctuations and present a greater risk, while others provide guarantees.
- Whole Life
Whole life is a traditional policy that uses very long-term interest rate assumptions to provide coverage for your lifetime. Your premiums, death benefit and cash value are guaranteed in most insurance contracts.
- Interest-rate sensitive
Interest-rate sensitive policies use current interest rates that change if interest rates change. There is the risk therefore that your premiums could increase if interest rates decrease.
The most popular interest-rate sensitive policy is Universal Life. It consists of two parts: life insurance, and an investment account. The premium you pay will be shared between cost of insurance charges and the investments you select. You decide how each part is set up and you can increase or decrease your premiums and death benefit within limits. Note that investment growth may not be guaranteed, and depends on the type of investment chosen. Be sure to speak with your life insurance agent or company to understand your investment options.
- Variable Life
Variable life insurance consists of two parts: life insurance, and an investment component (e.g. stocks, bonds, index and other investment funds). Premiums are usually guaranteed but the cash values vary according to the performance of the investment component. The death benefits may be guaranteed or may vary with the fund’s performance, subject to a minimum guarantee, and you need to be comfortable with the associated risks. You might want to ask for policy illustrations in which low returns are shown.
Also check your policy illustrations to see what the identified risks are.
For more information about permanent life insurance, review the Canadian Life and Health Insurance Association’s A Guide to Life Insurance brochure.
Term Life Insurance
Term insurance covers you for a specific period of time, and has an expiry date. It is suitable for more temporary needs or expenses that have a foreseeable end like your mortgage, putting your children through university, or business obligations like training your successor or buying out shares. Term insurance is usually purchased in terms of one, five, ten or 20 years, or to age 60 or 65.
If you start with a term policy, you may want to make sure it’s renewable or convertible into a permanent policy at a later date. That way you have some flexibility to meet your changing life situation.
If you die within this time, your beneficiaries receive the death benefit. If the specified time period ends within your lifetime the coverage expires, there is no death benefit payment, and you cannot claim the premiums you already paid. Term policies:
- don’t include cash values, so you cannot borrow against the policy or receive cash back if you cancel the policy.
- may be renewable at a higher premium when they expire.
- usually have lower premiums than permanent policies. Premiums are set by the insurer for the length of the term, and may increase if the term is renewed.
Term to 100 policies
Term to 100 policies provide life insurance coverage through to the age of 100 but usually do not have cash values. Their premiums are usually lower than whole life policies.
Term Life Insurance for Couples
Couples need to consider what coverage they may already have through group policies provided by their employers, as well as coverage they may have purchased while single. Make sure you weigh the options carefully, considering all the pros and cons.
If you get married and both parties have life insurance policies, contact your insurance agent or company to find out what options you may have. Ask if the existing coverage can be increased and if evidence of insurability is required. Also consider naming your partner as your beneficiary.
“No Medical Exam” Life Insurance
Some insurers offer “No Medical Exam” life insurance that may or may not require you to complete a questionnaire about your health. Coverage may be limited in these policies and may feature higher premiums.
You may be interested in...
Life Insurance 101 Getting Started: learn the basics of life insurance.
Questions to Ask About Life Insurance: consider asking your employer, human resources representative, life insurance agent or company these questions regarding your life insurance.
Working with a Life Insurance Agent or Company: understand what to expect when working with a life insurance agent or company.
All About Beneficiaries: learn what they are, who they can be, and how to update them.
Financial Literacy Portal: your one-stop shop for links to other great financial information.
Glossary: Life Insurance: to better understand common life insurance terms, refer to this glossary.