Life Insurance is designed for individuals who want to protect the financial security to the people they love most. When the life insurance holder dies, the survivors (the people who are dependant to the insurance holder) will receive a tax free cash benefit. The amount of money that is awarded to your survivors depends on your coverage level.
Life insurance can be obtained in two ways. The first way involves getting coverage through your work benefits. The employee will be under a employee group plan and the coverage will end when the individual leaves the company. The second way is by purchasing their own insurance plan from a broker or an underwriter.
Table of Contents:
Types of Life Insurance:
- A popular choice for individuals focused on affordability and flexibility.
- Designed to address your insurance needs at specific stages of your life. It can be used to cover specific liabilities such as mortgages.
- Rates are fixed for a given time period.
- At the expiration of the term you may reapply for coverage. Depending on the plan, you may need to provide proof of continued insurability.
- Your designated beneficiary is paid the coverage amount stated in your contract if you die within the time specified in the policy.
- Lowest initial cost, but cost may increase each 5, 10 or 20 years. Costs may increase depending on the situation.
Permanent Life Insurance:
- Popular choice for individuals with estate planning needs and prefer premium rates that never change over time.
- Flexible payment periods that suit your budget and needs.
- Premiums are generally set at a fixed rate that never increase over time.
- Permanent Life Insurance pays whenever you die, no matter the age.
- There are many different types of Permanent Life Insurance plans to choose from, such as:
- Permanent Life Insurance can hold cash value depending on the plan. This means the remaining money that the policy holder puts into the policy after subtracting the actual cost of the insurance.
Types of Permanent Life Insurance:
Whole Life Coverage:
Whole life policies offer level premiums for the rest of your life. This means you are paying the exact rate that you will pay in the long term, no matter the age or health status. It is also possible with Whole Life policies that you can have limited pay periods where, you pay the premiums for a period of 5 to 10 years which allow you to keep your policy without paying for premiums for the rest of your life.
Universal Life Coverage:
Universal Life insurance policies first came to Canada in 1982. These policies combine the renewability of term insurance, with an investment fund within the policy. Other main points of Univerisal Life insurance include:
- The investment fund is tax sheltered up to a specific point, but unlike savings in a whole life plan, the savings are controlled by you rather than the insurance company.
- The taxable amount can be found in the Income Tax Act and can be used to determine the maximum internal accumulation permitted before any permanent life policy is considered a taxable investment rather than a life insurance policy.
- If you have any concerns about the tax formula prescribed by the Income Tax Act, please contact the insurance company that issued your policy in order to determine if the policy is exempt.
Term to 100:
Term to 100 policies are a stripped-down version of Whole Life policies, but maintain several differences between each other. Just like Whole Life policies, Term to 100 policies maintain a internal cash value, but they are not paid to the insured if the policy is cancelled. Rather, the cash value is kept by the insurer to subsidize policies that are still in force (active). Therefore, this difference makes Term to 100 plans cheaper then Whole Life policies. Lastly, you are only required to renew the coverage up to age 100.
Why is Term Insurance cheaper than Permanent Life Insurance?
Term insurance is less expensive than permanent insurance for several reasons.
- As term insurance provides coverage for only a specified period, the risk of a death claim is greatly reduced. With a permanent life product, a death claim will be payable at some point in time provided the policy stays in force.
- With Term Insurance you pay for the actual cot of the insurance for your age. With Permanent Life Insurance, you pay a levelled premium, which means that you pay more in the early years of the policy in order to build up cash value in the policy. This cash build-up is used to subsidize your premiums in later years when the actual cost of your insurance is more than your levelled premium.
- Term Insurance provides you with greater protection for your money in the short-run, whereas the high initial cost of Permanent Insurance may prevent you from obtaining sufficient protection.
When choosing the right option for your situation, you should consider the following: your financial position, your short-term and long-term goals and your inidividual savings habits.