what to know before you buy

Canada Insurance / Syd Harmon

Purchasing the right life insurance policy is an important decision and is a key component of your financial plan.

In this article, we'll review some dos and don'ts that you need to be aware of, and some tips to help ensure you get the best coverage for your situation.

A life insurance policy is a legal contract between you and the life insurance company that outlines what coverage the insurance company will provide in return for your regular payments. While price may be an important consideration in purchasing a policy, the terms and conditions of the contract are equally important.

A life insurance contract requires you to pay money in regular installments (the "premium") and the insurance company agrees to pay a sum or sums of money to your estate or your designated beneficiary if you die and/or if certain other events or situations occur while the policy is in force as set out and defined in the contract. Some life insurance contracts are written in easy to understand language while others are complex legal documents.

Seek the advice and assistance of a qualified professional life insurance agent, broker or financial planner to help you assess your needs and to choose the life insurance contract that best suits your requirements. A competent professional will work with you to develop a detailed needs analysis of your situation. This analysis will define the amount of insurance you should acquire based on the financial needs of your family, your business and other financial considerations.

Beware of needs analyses that are short on substance but long on words. Many times these are nothing but hidden sales pitches. A well written needs analysis is detailed and takes into account your existing insurance, your existing financial resources and assets, government benefits, your income needs, your tax liabilities and other liabilities.

This information should be shown in an easy-to-understand format. A proper insurance needs analysis also provides for adequate reserving for unforeseen expenses and liabilities. The preparation of a full, fair and proper needs analysis requires the proper tools (financial planning software) and the knowledge and expertise of a qualified life insurance agent, broker or financial planner.

You should also be aware of so called "comparisons" where you are shown only a small number of choices. Here, a small number of choices (sometimes as few as only three or five) is shown under the pretense of "comparison."

In such a so called "comparison," your range of choice is very limited and better options are often missing. If this should happen to you demand to see a detailed print-out of an overall survey of available options over the same number of years. If the broker doesn't provide this information you need a different broker.

Common sense says that you should fully understand the policy, its terms, conditions, limitations and exclusions before you accept the policy. Any ambiguity should be clarified in writing.

Be aware that the application you sign forms part of the contract. Check to make sure that the application is fully and properly completed. Don't be afraid to ask questions. A professional and knowledgeable life insurance agent, broker or financial planner will take the time to fully both the application and the terms of the policy to you. Don't accept a comment such as "it's not important" as an answer. Every item on the application is important and may affect your coverage.

A fully and properly completed application will expedite issuance of the policy and will reduce the potential of difficulties later on.

You also need to know that the cost of life insurance will depend upon the type of policy, your age, and your health.

A life insurance contract is made up of provisions, options, and riders. Provisions describe or explain features, benefits, conditions, or requirements of the contract. Options are features of the agreement that require you to make a choice regarding some aspect of coverage. Riders are additional coverage (or endorsements) offered by the insurer at the time of application and added to the standard agreement in return for an additional premium.

Finally, you need to know the tax consequences of owning life insurance.

• Life insurance premium payments are not tax-deductible expenses.
• In general, the death benefit paid to the beneficiary is not included in gross income for federal income tax purposes, because it is paid with after-tax dollars.
• You must be very careful about who owns the policy and who the beneficiaries are, in order to avoid estate taxes on the proceeds when you die.