I know the subject of life insurance isn’t the most inspiring topic to discuss but I felt compelled to write on this subject after speaking with a farmer at the Paskeville Field Days last month.
Perhaps it might help to first briefly outline the types of life insurance before I proceed with my discussion with the farmer.
Whole of Life and Endowment insurances
Those of us who are older may recall Whole of Life and Endowment insurance policies. These were virtually the only insurances available until around 25 years ago when new Term Life cover was introduced. These older style policies were known as traditional or permanent insurances because they could remain in place for the life of the insured for a fixed premium. In reality, the premium actually became cheaper each year because of the effects of inflation. Another wonderful benefit of these policies is that the level of insurance cover increased each year because of investment bonuses. There’s even the ability to borrow against the cash value of the policy. And, if the policy is surrendered, a cash value is paid out. These polices offered a wide range of benefits to meet so many of life’s circumstances.
The life insurance industry created Term Insurance which is vastly different to traditional whole of life and endowment policies. The only similarity between the old and new style policies is that there is life cover. Term Insurance premiums are based on the age of the insured and generally increase with age. This means the premiums can get prohibitively expensive for people in the 50’s and 60’s. Often this is exactly when the cover is cancelled and, unlike permanent insurance, there isn’t a cash value on terminating the cover.
So, for simple effective life cover, Term Insurance works well for younger ages. It isn’t as suitable for older people, such as farmers, who are looking to provide an estate planning solution for the next generation. While Term Insurance is available to age 100, the premium rates are unaffordable.
Term insurance not ideal for estate planning
I’ll now return to my meeting with the mid north farmer. His intention is to leave the family farm to his sons and was advised to arrange Term Insurance as an ideal estate planning solution to provide cash on his death for his off-farm children. In theory this would work except that he’s 57 and the premium is $2,720 per year for $500,000 and by the time he’s 70 it will be $19,236 per year! Heaven help if he lives to the average life expectancy of 84. It clearly isn’t an ideal solution and unfortunately, there isn’t an insurance product today that can deliver economical estate planning outcomes.
In advising country clients, the topic of insurance often comes up and we learn that many people have existing permanent insurance policies sold by insurance agents many years ago. If you have an old permanent life insurance contract and someone encourages you to cancel or surrender it, we suggest first seeking advice from someone who has the knowledge and experience in this field. You might be amazed to learn that even the staff of life insurance companies don’t understand these old policies and often provide inaccurate or misinformation. Speaking to the right person first could make a significant difference to financial and estate outcomes.