Last week I talked about life insurance, defined some key industry terms, and gave some tips on how much insurance you should buy, if any. Now we’re going to look at the best types of insurance, as well as how to avoid life insurance gimmick products.

You’ve heard the phrase, “buy term and invest the difference”? Term insurance is pure insurance protection, there are no gimmicks, bells or whistles. The premiums per $1,000 of insurance are the lowest of any form of life insurance, often by 50 percent less than whole life plans. Term insurance is cheap and pays sales people far less in commissions, and therefore is rarely offered unless you insist.

There are no valid financial reasons for buying or keeping whole life or universal life policies at any age. You are always better off buying term insurance and investing the difference yourself.  Unless your health is deteriorating and you are no longer insurable, you should drop your whole life or universal life policy and replace it with term, investing the difference in your RRSP, TFSA or non-registered account.

If possible, don’t set up your insurance policy to pay out a lump-sum upon your death. Set up your life insurance plan to have the proceeds invested so that income is generated for many years, rather than subjecting a lump sum to unintended mismanagement or bad financial advice.

Here are a examples of life insurance gimmicks to avoid:

  1. Never buy whole life insurance as an investment – They say that whole life is a plan where your money goes into a “hole” never to be seen again.  Whole life policies typically have level premiums (equal yearly installments) and claim to build tax-deferred cash value. The problem is that the cash value, which is built up by your premium payments, is minuscule compared to what you could create with proper investments.
  2. Never buy life insurance when you’re young just because it will cost less – The only reason to buy life insurance when you are young is for financial protection for your family, not saving money.
  3. Never buy life insurance just to avoid the threat of being uninsurable in the future – All insurance is a bet and the odds are overwhelmingly in your favour when it comes to insurability. Future insurability is a scare tactic used by salesmen for the purpose of selling you more insurance at an early age.
  4. Never buy life insurance just because you recognize the company name – Just because you recognize the name from ad’s on TV doesn’t make the insurance any better.  Make your choice based on lowest rates, not name recognition.
  5. Never buy double indemnity for accidental death – When you buy this option, twice the face amount of the policy will be paid to the beneficiary, but only if the insured dies an accidental death.  It is cheaper just to top up the base amount of your policy than to pay for this expensive option.

Purchasing life insurance can be one of the most confusing financial decisions you ever make, but with a little knowledge and understanding of the type of insurance and amount of coverage you require, you’ll be prepared to buy the right policy for you and your family.

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