Most Canadians think of life insurance as a singular product: something for which you pay a monthly fee and receive some sort of financial guarantee, should something unfortunate happen to you.
The truth is life insurance offers more nuanced financial protection, with several different types that suit some situations better than others. Whether a new parent is looking for simple, temporary protection for their new family, or a soon retiring Canadian is looking to protect their family from paying for their final expenses, these different types of life insurance each have their own distinct profile and protection intention.
While choice is usually a good thing when you’re shopping for most products, when you aren’t completely informed of the nuances between different insurance products, you may choose the wrong one or procrastinate due to the inertial brought on by too many choices. Luckily, we’ve taken the time to explain what the different kinds of life insurance are for and hopefully help you choose the right one for your unique financial situation.
Term life insurance
Term life insurance covers you for a specified length of time, called a term, and pays a set death benefit within that term. There are different term lengths available such as 10, 20, or 30 years, though some providers offer different variations, let you pick a term, or offer coverage until the age of 65.
So why only get coverage for a set amount of time as opposed to your whole life?
Term life insurance is designed to cover needs that are temporary: Major milestones like mortgages (where you eventually pay off the debt) or children (where they one day no longer depend on you financially). Because you are only taking temporary coverage, the rates are usually less expensive for term life insurance than other forms of coverage.
You choose your coverage amount and term and the insurance company determines your premiums based on that as well as your health status and other risk factors. Those premiums then stay level throughout the term.
At the end of the term, one generally has the option to renew their policy – although the premiums will be higher due to the increased cost of insuring your life. If at this point your financial situation has changed and you no longer need that temporary term coverage, you can let it expire.
Lastly, most policies let you convert your term life coverage into permanent life insurance (as long as it is before you have reached a specific age).
Whole life insurance
Whole life insurance covers you for life, just as its name implies. Additionally, there is a cash value or investment component associated with the policy. As you pay into your policy over the years, any excess funds which don’t go directly to your coverage are invested into a portfolio, receive tax-advantaged dividends and build investment value.
You can cash out the value of the policy for whatever reason you wish, though most use it to build their estate value, supplement their retirement income, or help pay end-of-life expenses or debts. You can even borrow against the cash value of a whole life insurance policy. Because of the lifetime coverage and investment component of whole life coverage, the premiums are typically higher than term insurance.
Limited-pay whole life insurance
Limited-pay whole life insurance has the same lifelong coverage as above but the payment term is specified (typically for 10 or 20 years). When one pays these premiums for the specified limited-pay timeframe, the coverage is guaranteed for life without having to pay any additional premiums. Generally, this coverage has the highest premiums since they are front-loaded to avoid payment in a policyholder’s later years.
Universal life insurance
Universal life insurance is – again – similar to whole life coverage. The difference this time is the investment component is self-directed and therefore there are no guarantees associated with growth or premiums. An insurance provider will give a policyholder options for how they can invest the cash value of the policy. Universal life coverage is often misunderstood but can be a good option for those who have exhausted their other tax deferred investment options.
If you are a mindful investor and like keeping an eye on your finances, universal life insurance may be appealing due to its self-directed nature. Universal life insurance is the coverage option which requires the most hands-on activity.
Term-to-100 insurance is essentially a whole life policy with no options for accessing its cash value. It only pays the death benefit if you pass away, and thus it is typically the least expensive whole life coverage option. On the upside, if you make it to age 100 you’ll still be covered and no longer be required to pay premiums.
What is the best type of life insurance?
There’s no one-size-fits-all answer when it comes to life insurance. Your financial needs and family situation are just a couple of factors that help determine what type of coverage best protects those you may leave behind in the unfortunate event of your passing. Tools like PolicyAdvisor’s life insurance calculator and online quoting tool can help you figure out how much coverage you need and what it may cost, and their licensed Canadian insurance experts can help you determine what type of coverage is the best for you if you still need some help.
PolicyAdvisor.com is an innovative Canadian online insurance broker providing a digital solution to an archaic industry, combining modern technology, intuitive design, and real-world expertise to make insurance buying simpler, straightforward, and stress-free. Visit www.policyadvisor.com to access our free online insurance calculators and find out how you can save money when comparing and buying insurance online.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Justwealth, or its employees. The content of the article is provided solely for information purposes only and should not be construed as advice of any kind.