Making the decision to start investing in your loved ones future by getting life insurance coverage is a sobering exercise. But do you know what type of life insurance policy is right for you? And are you aware of what life insurance can do for you, beyond helping pay for a funeral and related expenses? We dissect the two main types of life insurance policies and touch on some of the variations that fall under them to help you decide which type of policy best suits your individual needs.
Types of life insurance policies
The best life insurance policy for you depends on your own needs, and learning about the options available to you is very important. There are two main types of life insurance with dozens of variations. For your stage of life and financial preparedness, here are some of the policies to consider:
Term vs. Permanent life insurance
The two main types of life insurance in Canada are term life insurance and permanent life insurance. We will outline the basics of these two types of insurance policies, and briefly describe variations of each below .
1. Term life insurance
As the name implies, term life insurance covers you for a particular number of years, typically 10, 20 or 30. It is usually more affordable because it is only for a fixed duration. If you die before the term is up, your family receives a set amount of money. The death benefit gets paid to your loved ones as a monthly payment, an annuity or a lump sum. When you sign up for term life insurance, you must specify the coverage amount and coverage time. The insurer takes these details into account while calculating your premium rates.
What happens when the expiry date approaches?
If your beneficiaries no longer need the life insurance coverage, you can simply let the policy expire. However, for most people, this is not an option. If you still need coverage, there are three options available:
- Extend your current term policy: It is renewable without you having to re-qualify or take another medical exam.
- Convert your term policy to a permanent life policy: If your policy has a conversion rider, you can switch policy types without having to have it underwritten again.
- Buy a different life insurance policy: You can expect to pay higher premiums as the cost of insurance goes up with age.
Types of Term life insurance
Along with the three main types of coverage, there are also other term life insurance policies options for you to choose from:
- Joint life insurance: A joint policy insures two people (generally you and your spouse or common-law partner) as a single ‘life insured’. Your joint premiums are higher than with single coverage, which makes up for the increased risk that the benefit will be paid out.
- Level, increasing or decreasing benefits: Both term and permanent policies give you the option of either levelling, increasing (cover liabilities that increase over time) or decreasing (liabilities that decrease in value over time) death benefit.
2. Permanent life insurance
Permanent life insurance, also known as “whole life insurance,” lasts for an entire lifetime. As long as you pay your premiums, you will not need to worry about the term coming to a close. Nor will you need to be concerned with ‘aging out’ like you do with term policies. Because of this security, they are much more expensive than term policies with similar coverage.
To help offset the expense, permanent life policies offer other benefits, including tax-advantaged investment. This is known as a participating policy, meaning you may participate in the profits of the insurance company through investment. The investments are in a tax shelter, so all investment income earned in a whole life insurance policy is tax-free when left to your beneficiary.
Also, permanent policies feature a cash value, also known as a “cash surrender value” or CSV, which grows the longer you have the policy. This amount exists if you want to borrow against your policy or cancel it to redeem the CSV a.k.a. “surrendering.” Most policies will not have this option available from day one. Many insurers will also charge you high surrender fees that gradually decrease over time.
Types of Permanent life insurance
Permanent premiums are generally more expensive than term premiums while you’re young, but are cheaper later in life, offset by the more expensive premiums paid earlier. Here are the main types of permanent life insurance you’ll come across:
- Term-to-100 life insurance: A hybrid of term and permanent coverage. It works like a simple term policy, but covers you for life. As it is guaranteed to pay out, you will pay higher premiums than term policies.
- Whole life insurance: It allows you to build up a CSV over time, then the insurance company invests these funds. The returns are used to either reduce your premiums or are added back to your cash value as interest. Your cash value is an asset. It can be used to reduce your premiums, borrow against or withdraw from. If you cancel a whole life insurance policy, you’ll receive your cash value back, less any termination fees.
- Participating vs non-participating life insurance: A whole life insurance policy is either participating or non-participating. The difference is in what is done with the returns from investing your cash value, or cash surrender value (CSV). A non-participating policy will help reduce premiums, while with a participating policy, the interest that you gain will go back into your CSV.
- Universal life insurance: It is insurance and an investment account in one. While whole life insurance doesn’t let you choose an investment strategy, universal policies allow you to invest your CSV in any way you wish. You can invest in cash, bonds, exchange traded funds, etc. Because of this, your premiums in universal policies are often referred to as investments.
More types of life insurance
There are existing life insurance policies worth mentioning that are more customer-specific, such as:
- Guaranteed life insurance: A form of permanent life insurance. You are guaranteed to be accepted with no medical or personal information required. If you are unable to qualify for insurance due to pre-existing conditions, this is an ideal option.
- No-medical life insurance: No-medical, or simplified, life insurance is similar to guaranteed life insurance. If you are otherwise insurable, you would qualify. No medical is required, but you may be asked some medical questions to determine your risk.
- Mortgage life insurance: A special type of term insurance, sold by mortgage providers. Its purpose is to make sure that your mortgage is paid if you were to die while you still owe money.
Life insurance in one of the most complex investments you will ever make. With all the variations out there, it is easy to get lost. Our isure representatives can take you through the policies to help you choose the right one for you and your loved ones.