Our tagline has three words – Plan | Invest | Protect. Three simple words, but they are loaded with potential. This month, we’re talking about “Protect” and how a comprehensive financial plan includes protecting you, your family, and your legacy.
How’s that done? Life insurance. It’s the elephant in the room because no one likes to face the fact that someday, we’ll no longer be here. But it’s crucial to understand your options for insurance as a way to financially protect those you love.
Understanding Life Insurance in Canada
Most of us are familiar with insurance – we must have auto insurance to legally drive our cars, home or tenant insurance for mortgages and leases, and perhaps we get health insurance benefits with our work. Life insurance is another form of protection, but it’s not going to affect you directly. Instead, it’s protecting the people you love.
Choosing life insurance is one of the best ways to provide financial security and assurance when you pass. A life insurance policy is purchased, premiums are paid on the policy, and when the policyholder passes away, the value of that insurance policy is given, tax-free, to the named beneficiary.
There are a few different types of life insurance in Canada.
1. Term Life Insurance
Term life insurance is one of the most straightforward and affordable types of life insurance. It provides coverage for a specific period, known as the term, which can range from 10 to 40 years. If the policyholder passes away during the term, the beneficiaries receive the death benefit. If the term expires and the policyholder is still alive, the coverage ends, and no benefit is paid.
Benefits of Term Life Insurance:
- Affordability: Term life insurance typically has lower premiums compared to permanent life insurance, making it accessible for many families.
- Flexibility: You can choose the term length based on your needs, such as covering the duration of a mortgage or until your children are financially independent.
- Simplicity: The policy is straightforward, with no investment component, making it easy to understand and manage.
2. Permanent Life Insurance
Permanent life insurance provides lifelong coverage, as long as premiums are paid. There are several types of permanent life insurance, including whole life, universal life, and variable life insurance.
Benefits of Permanent Life Insurance:
- Lifetime Coverage: Permanent life insurance ensures that your beneficiaries will receive the death benefit regardless of when you pass away. One small caveat here-most policies automatically end at age 100.
- Cash Value: These policies accumulate cash value over time, which can be borrowed against or used to pay premiums.
- Estate Planning: Permanent life insurance can be a valuable tool for estate planning, helping to cover estate taxes and providing a legacy for your heirs.
3. Whole Life Insurance
Whole life insurance is a type of permanent life insurance that offers fixed premiums, a guaranteed death benefit, and cash value accumulation. The cash value grows at a guaranteed rate, and policyholders can access it through loans or withdrawals.
Benefits of Whole Life Insurance:
- Stability: Fixed premiums and guaranteed cash value growth provide financial stability and predictability.
- Savings Component: The cash value can serve as a savings vehicle, offering a source of funds for emergencies or retirement.
- Long-Term Planning: Whole life insurance is ideal for long-term financial planning, ensuring lifelong coverage and financial security.
4. Universal Life Insurance
Universal life insurance is another type of permanent life insurance that offers flexible premiums and death benefits. It also includes a cash value component, which earns interest based on market performance.
Benefits of Universal Life Insurance:
- Flexibility: Policyholders can adjust premiums and death benefits to suit their changing financial needs.
- Investment Options: The cash value can be invested in various accounts, potentially increasing the policy’s value over time.
- Tax Advantages: The cash value grows tax-deferred, and withdrawals may be tax-free if structured correctly.
Choosing the Right Life Insurance
Selecting the right life insurance policy depends on your individual needs and financial goals. Here are some factors to consider:
- Coverage Amount: Determine how much coverage you need based on your financial obligations, such as mortgage, education costs, and living expenses. This is where a strong financial plan comes into play-talk with your advisor.
- Budget: Consider your budget and choose a policy with premiums you can comfortably afford.
- Policy Features: Work with us to evaluate the features and benefits of each type of insurance to find the best fit for you.
Other notes
Life insurance premiums are based on a few factors:
- Policy type
- Age of applicant
- Amount of coverage
- Length of term
- Medical conditions/risk factors (policy dependent)
Depending on your age and the amount of insurance coverage you are buying, a medical questionnaire and/or tests may be required.
A vital part of your financial plan
Life insurance is a vital component of financial planning, providing security and peace of mind for you and your loved ones. Whether you opt for term life insurance for its affordability and simplicity, or permanent life insurance for its lifelong coverage and cash value benefits, we’re here to help you make an informed decision that meets your needs.