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.
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 This money may be accessed prematurely on a borrowed or surrendered basis, which refers to permanently withdrawn money in exchange for a smaller amount to be paid to the beneficiary.
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.
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.
Consider the following factors when determining if permanent or term life insurance is best for you: