Life Insurance covers your loved ones in case of an unexpected death. This can leave family members struggling emotionally and financially, especially if you are the breadwinner for the family. The family is given a lump sum of money to help deal with financial burdens. Having Life insurance gives you peace of mind while living and provides the necessary financial support when you pass away. On this page, we will explain the basics of life insurance. More details will be included in future blog posts or can be discussed by contacting me.
Having the right amount of coverage from a good company is very important. This will help the surviving family to maintain the same standard of living. This will mean that the family would not have to sell the house and your kids can keep going to the same school. The amount of coverage is calculated using various methods which take into account the following
- Your Debts including Mortgage, Car Loans, and any other personal loans.
- Income required per year and the number of total years support for the family would be required in case of your death.
- Your current Savings and investments including your TFSA, RRSP and other savings accounts. As these can support the family so these reduce the amount of insurance required.
There are different types of Life Insurance. These are divided into the term and permanent types
Term Life Insurance
The term life insurance covers you for a certain period of time e.g. 10, 20, 40 years from the date of the contract. If you enter into the contract for 40 years, your premium will stay the same for the next 40 years. The longer the term higher the premiums would be therefore a 10 year is going to be quite a bit cheaper than the 40-year term. It is always advised to play it safe and buy the longest term that you think you could need the insurance for. If you only buy a 10-year term, the prices could go up significantly at the time of renewal. Also, you could be at the risk of not being able to renew your coverage if your health deteriorates before the time of the renewal.
Term life is the cheapest kind of insurance. There is a good chance that the insurance company would not have to pay the death benefit.
Permanent Life Insurance
Permanent Insurance provides coverage for the entire lifetime of the insured person.
TERM 100
This type of insurance is similar to term but you are covered for life as long as you keep making the payments. Payments remain the same throughout. This is more expensive than term life insurance. The insurance company knows that they will surely have to pay the death benefit out.
Universal Life
– This type of insurance combines insurance with an investment component. A portion of the premiums you pay goes into paying for your insurance. Another portion of the premium is invested in your choice of available funds. This type of insurance provides is more expensive than Term and T-100. It provides a lot of flexibility to the policyholder. Some of the advantages are as follows:
The death benefit can be increased.
Tax-sheltered investing up to a limit.
It can take premium holidays as long as cash value can support basic insurance payments.
It can increase(up to a limit), decrease payments.
Control over which funds money is invested in.
Option to pay off the policy in a certain number of years e.g. 20 years.
Possible to take loans against cash value accumulated in the policy to supplement retirement income. These loans need not be paid back and can be deducted from the death benefit. Can be ideal for individuals who expect to be in higher tax brackets in their retirement.
Whole Life
This type of insurance combines insurance with an investment component just like Universal Life. The difference is in the investment component. In Whole Life, the insurance company invests the money themselves and pays you a dividend from the proceedings. This builds up cash surrender value (CSV) inside the policy over time. This can be like a money back if you surrender the policy. You can decide to partially surrender the policy as well. Depending on the company and the policy wording, this cash value can get added to the death benefit, increasing the total payout at the insured’s death. You can pay for the policy in multiple ways including but not limited to the following options
- Pay up in 10 or 20 years.
- Provide a lump sum payment.
- Have ongoing premiums till 100.
Conclusion
Deciding between different types of insurance can be hard. It always helps to have an experienced agent help you out with the decision. An experienced agent would do this by taking your overall financial situation into account. Term life makes sense for most people. In some cases, permanent insurance can make sense but you will have to understand what you are getting into beforehand as it is a lifetime commitment. Whichever insurance you choose it has to fit into your overall financial situation. Just like other things in life, do not overextend your budget to buy expensive insurance on someone’s recommendation. Understand the product and decide if it fits your needs and budget.
Please feel free to talk to me by either calling me or reaching out to me via email for all your insurance needs.