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Homeowner's insurance policy has come a long way since the days in 17th-century Europe when it was commonly used as a way to profit from the death of prominent individuals. Over a few pints of grog, a group of enterprising low-life's would agree to take out a policy on the life of a well-known politician or man about town. Then they would arrange to have him murdered.
In modern times life insurance has gained in popularity, not least among Canadians, whose average coverage of $29,000 makes them third only to the Japanese ($50,600 each) and Americans ($35,430 each) in the amount of life insurance they own. But life insurance companies still have an image problem. Industry surveys show that the public ranks insurance agents behind almost every other type of financial adviser, from investment dealers to trust company officers, in terms of reliability. A major cause of that distrust has been the questionable quality of the policies agents sell.
In the past decade, the whole-life policy, which is the mainstay of most insurers' product lines, has come under unprecedented assault. Sold as both a form of insurance and forced savings, whole life is now regarded as a singularly unattractive investment and an expensive way to buy insurance. When you buy a whole-life policy, part of the premium payment goes to buy insurance and part goes into a savings fund called the cash value of the policy. But companies have traditionally paid very low rates of interest on those cash values and the consumer doesn't receive the cash value unless she cancels her policy. Understandably, by the late 1970s, consumers were cashing in whole-life policies in droves, putting their money instead into higher-yielding investments.
Recently, insurers have made a belated attempt to stanch the outflow of dollars from their coffers by introducing more attractive policies. No longer does the consumer simply have to choose between whole-life and term insurance, an inexpensive form of coverage in which he buys straight insurance for a fixed period of time, say five or 10 years. Today, kitchen-table conversations between agents and potential customers are likely to dwell on several new types of policies with names such as new money, universal life, variable life and adjustable life. Yet the newer forms of policies are fraught with drawbacks that need to be taken into consideration by canny consumers.
Home owner's insurance policy first appeared on the scene in the late 1990s and has grown in popularity ever since. The name refers to the fact that the policies pay much higher interest rates (say 8% instead of the 4% or so of older policies) on the cash value that builds up in the policy for the benefit of the consumer. The rate is adjusted every five years based on the trend of interest rates in the economy. When interest rates in the economy go up, the company makes a better return on its own investments, so at the end of five years it can increase the amount of coverage in its policy with no increase in premium payments. Conversely, if rates have gone down in the economy, the company charges more for the same amount of coverage. Obviously the buyer shares in the company's risk. You should not purchase a new-money policy unless you are willing to gamble on the course of interest rates.
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