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What Kind of Life Insurance Do I Need?

Feb. 25, 2013
3 mins
A young couple walk down the street on their vacation

Not sure of your life insurance needs? Insurance can be bought to provide coverage for a number of reasons.

Some insurance consumers are looking to provide income for loved ones in case they should die, while others want to cover ongoing financial commitments such as a mortgage or tuition. Others are looking to add to their financial assets and build equity over time.

Whatever your insurance requirements, coverage exists to protect you -- the policyholder. Finding the perfect insurance fit depends on your personal financial responsibilities, dependents and goals.

The first step is to determine how much coverage is required to cover your existing financial requirements or to provide income to dependents after your death.

While a wide variety of policy options are available on the Canadian market, life insurance can generally be divided into two categories: permanent and term life insurance. These two coverage types offer differing features making them suitable for a range of life stages and coverage needs.

What is permanent life insurance?

Permanent life insurance never expires as long as premiums are paid. It is valid for the entirety of the policyholder’s life, and is only paid out when they die.

In the case of death, a pre-selected beneficiary receives the pay out of the insurance policy, and can use the funds for any reason they choose. Permanent life insurance coverage is very comprehensive and provides guaranteed lifetime coverage for the policyholder. That means premiums can never increase even as the policyholder ages or experiences health issues later in life.

Because older policyholders will pay higher premiums on insurance in general, permanent life insurance offers very competitive premiums later in life if qualified for at a young age. The trade off is that a young person buying permanent life insurance will pay higher premiums at the time than what they would be with a term insurance option.

Take advantage of your youth! If you can swing the monthly payments, qualifying young for permanent coverage can save you thousands in the long run. While you'll be shelling out more than you would for Term early on, you'll be sitting pretty in your golden years paying premiums meant for someone in their 20s or 30s.

Permanent life insurance is also priced higher than term because it accumulates cash value as premiums are paid over time. This money may be accessed prematurely on a borrowed or surrendered basis, which refers to permanently withdrawn money in exchange for a smaller amount to be paid to the beneficiary.

Benefits of permanent life insurance

  • Get a tax break: The cash value accumulates tax-free, and the beneficiary will not be taxed when receiving it. Premature withdrawals are also not taxed, as long the the premiums are paid, and the policy is active.
  • A liquid investment: Money paid toward permanent life insurance builds equity which can be pulled out of the policy penalty-free if desired. This means your money is available to you in emergency situations.
  • An easy way to save: Because a permanent policy accumulates cash value, it’s an effortless way to save funds for future use, and have peace of mind in a worst case scenario. Thinking of getting permanent life insurance?

What is term life insurance?

Term life insurance offers temporary coverage for a set period of time, and only pays out the death benefit should the policyholder die before the term is up.

The term may be set as a number of years, such as one-, five-, 10-, 20- or 30-year terms, or be set by a maximum age, such as 65 years. Coverage ends once the term is expired, and must be renewed again if the policyholder is to remain covered.

A term policy has no accumulated cash value, and there is no payout upon expiry, except in the case of the policyholder’s death. Therefore, it offers no equity to the policyholder. During the insurance term the premium rate and death benefit are guaranteed not to change. However, if the policyholder must re-qualify for the coverage once the term expires, they may face higher premiums as a result of their advanced age or other medical factors.

Term 100 life insurance also exists for those looking for whole-life coverage. This type of insurance is often marketed as permanent or whole life insurance, but only covers the applicant to age 100.

Benefits of term life insurance

  • It costs less: Depending on your age and length of term, this option can cost up to five times less than a permanent option.
  • Future options: Unlike permanent insurance, which is set for life, term insurance may be converted to permanent coverage at a later date.
  • Easy out: If you wish to end your coverage, simply stop paying the premiums.

Term life insurance offers cheaper premiums than permanent life insurance, and is a good cost-effective option for covering shorter-term financial requirements, such as the payment of a mortgage, car or post secondary education.

A permanent life insurance policy doubles as a savings vehicle; all those premiums will build over time, creating a liquid asset you can tap into.

How to pick your life insurance policy

Consider the following factors when determining if permanent or term life insurance is best for you:

  • How much insurance do I need? How much money is required to cover your current financial commitments, or replace your current income in order to maintain the same standard of living for your beneficiary?
  • Will my insurance needs change when I’m older? While it can be difficult to predict your financial needs decades from now, it’s important to factor in the ongoing costs of aging, such as medical care, downsizing, etc.
  • Who will benefit from my coverage? It’s important to identify who your beneficiaries will be in the case of your death. Will your spouse or children rely on your policy to support them financially?
  • What will my coverage pay for? Do you have outstanding financial obligations, such as tuition or mortgage payments? Will your policy cover regular income to the beneficiary that would otherwise be lost in the case of your death?
  • Will I need my money sooner? Is there a chance you’ll need to access your money for other expenses prior to your death? Some policies allow the premature withdrawal of your life insurance funds on a borrowing or surrender basis.
  • Am I looking to build assets?  A permanent life insurance policy accumulates value over time as premiums are paid on the policy. This can be considered an asset when estate or will planning.
  • What else is in my retirement portfolio? Is your life insurance policy the only method of financial protection in place for your future? Do you have other investments that will be valuable enough to provide for your dependents, and can rely less on life insurance coverage?
  • How old are you?  If you’re buying a policy earlier in life, you could benefit later on from qualifying now for competitive permanent coverage.
  • Do you have dependents?  Your insurance needs can be very different if you’re married, common law, have children or are single.
Penelope Graham

A first-time homeowner and newbie investor, Penelope Graham is the quintessential millennial, navigating the world of personal finance and wealth management. A self-professed monetary policy nerd, she follows the often-controversial housing market closely and specializes in mortgage, credit card and personal finance news.

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