Have you been confused by the different names for life insurance policies—term life, whole life, universal life? This guide from Alliance Income will familiarize you with the most common types of life insurance available in Canada to help you appreciate their benefits and limitations. We hope that it helps with your financial planning.
In this article
The Purpose of Different Types of Life Insurance
The premise of life insurance might seem simple, especially if you are a first-time buyer. When the insured person passes away, their named beneficiary or beneficiaries receive a sum of money to cover expenses. However, insurance policies can play different roles in a broader financial strategy.
Before you buy a life insurance policy, consider why you need life insurance and who your insurance policy will protect financially. Each life insurance product has advantages that fit best with certain family situations and goals.
Discuss your circumstances with an experienced insurance broker so that you understand all of your life insurance options.
Protection for Loved Ones
A core function of life insurance is providing peace of mind and financial security to dependents if the policyholder passes away while the insurance is in effect.
The insurance payout replaces lost income, pays bills, and provides support for children and other family members who rely on the earning power of the policyholder.
For many policyholders, the primary motivation for buying an insurance policy is to ensure that a partner or dependent does not face financial hardship when the policyholder dies. An insurance policy can culminate a lifelong vow to take care of and protect the most important person in their life.
Coverage for End-of-Life Expenses
Someone with no dependents (or dependents who have other means of financial support available to them) might not need to take out an insurance policy. After all, they won’t need to support anyone else after their death. However, their loved ones will still want to hold a funeral, memorial, or other service and those services are only becoming more costly.
A modest insurance policy can provide money for final expenses while the rest of the estate goes through probate.
Part of an Investment Portfolio
Some forms of life insurance yield a return on investment that makes them suitable as a conservative component of a comprehensive investment strategy. Life is for living. Why shouldn’t life insurance play the vital role of ensuring that the policyholder has the financial means to enjoy the later years of their life? Certain life insurance policies in Canada have a cash out component which can act as a sound investment vehicle.
Temporary vs Permanent Insurance
The broadest distinction we can make between different types of life insurance is the distinction between temporary and permanent life insurance. The most common types of life insurance are term life, a type of temporary life insurance, and whole life, which is permanent life insurance for your lifetime.
The broader categories of term life and whole life insurance include subtypes that help policyholders tailor their policies to their needs. Policyholders can also consider other types of insurance, such as universal life insurance and survivorship insurance.
Death by suicide might not be eligible for coverage, depending on the term of the policy.
Term life insurance provides temporary coverage for a fixed term in exchange for paying the premiums. If the policyholder lives past the end of the policy’s term, the policy no longer has any value.
Whole life insurance provides coverage as long as the policyholder makes payments. In addition to coverage in the event of the insured person’s death (or other triggering event), the policy builds value. Some whole life insurance policies allow for more flexibility in making payments. Take care to understand the consequences of missing a payment for any insurance policy before you purchase a policy. Our team at Alliance Income can help you to understand the details of whole and term life policies in Canada.
Types of Temporary Life Insurance
Many types of life insurance fall under the category of temporary insurance. Temporary can mean a month or two for stopgap coverage or can last for decades.
Term Life Insurance
Conventional term life policies provide coverage for terms of up to 30 years in exchange for a defined premium.
Term life insurance depends on the payment of monthly premiums to continue coverage. If the policyholder misses payments, the policy can lapse. A lapsed policy will not pay out if the policyholder dies.
Level-term policies provide constant coverage throughout the policy term, while other policies provide variable coverage. One type of insurance offers decreasing coverage over a period of time but keeps the premium constant.
Some types of insurance policies provide low premiums, like conventional term life but offer additional benefits and flexibility.
Convertible Term Life Insurance
Some term life policies can convert into permanent policies. Convertible policies are ideal for customers who want whole life insurance eventually but cannot afford the premiums.
Policyholders who convert to a permanent life insurance policy will typically avoid the requirements of having to apply for a new insurance policy, such as a physical exam.
Term-to-100 policies offer lifetime protection but cost less than permanent life insurance policies. The policy will pay out upon the insured person’s death but will not have a cash value component.
The policyholder will have to pay premiums until they reach age 100. Beyond that point, they will have term coverage even though they no longer need to pay.
Whole Life Insurance
Whole life insurance works as both an investment and a life insurance policy. The premiums entitle the policyholder to coverage as with a term life policy, but a percentage of the premium goes toward an investment that gains interest. The policyholder can cash out the policy to recover its cash value.Some forms of whole life insurance, called limited-pay insurance, require the policyholder to pay premiums for specified lengths of time. After this period, the policyholder retains life insurance coverage and can keep and grow the policy’s cash value.
Participating Life Insurance
Participating whole life insurance policies are like conventional life insurance policies, with the added benefit of an ownership stake in the life insurance company. Participating life insurance policies cost more than non-participating plans, but they pay out dividends that can offset the higher costs of premiums.
As with any investment, customers should consider the estimated return on investment along with the costs before deciding on any of these types of life insurance.
Funeral Life Insurance
Funeral life insurance policies are low-cost policies that pay out a modest sum for funeral and memorial expenses. If illness or financial constraints prevent an individual from taking out a conventional life insurance policy, they might still be eligible for funeral life insurance.
Universal Life Insurance
Universal life insurance policies are permanent policies that offer more flexibility in terms of premiums and death benefits. Policyholders can choose how much money they want to pay for their premiums, subject to minimum and maximum amounts.
If policyholders pay lower premiums, they might have little or no cash value in their policy. Paying higher premiums can increase the value of their policies, and upturns in the market can cause their cash value to increase faster.
Universal life insurance policies are often good choices for people with variable incomes or who anticipate changes to their needs for coverage.
For example, if a policyholder works on a commission or a contract basis, they may be more or less able to contribute to insurance premiums from month to month. Similarly, a person with children nearing college age or fostering children might choose to reduce the benefit amount after they no longer need to support dependent children.
If a policyholder wants to increase the amount of their death benefit, they should plan on going through the underwriting process again, which could involve taking medical exams.
Choosing a Custom Life Insurance Package
The wealth of choices can make it challenging to select the right policy. Many variables influence the optimal choice for a life insurance policy. Many of the most important factors are unknown. Insurance companies use advanced statistics to calculate the premiums for each policyholder. Customers must be savvy as well in assessing their own needs.
As you consider the policy that works for you, ask yourself the following questions.
- If you were to pass away, would your family have the means to maintain their current standard of living?
- If not, how much money would they need?
- Do you envision the number of dependents or their level of financial need changing over time?
- Would other investments yield a higher return than a whole life insurance policy?
- Do you value the peace of mind that comes with an investment in a life insurance policy?
Your choice of a life insurance product affects your future and the future of your loved ones. Take time to fully understand your options before you purchase a policy.
Conclusion: Get the Right Life Insurance Policy for You with AIS
At Alliance Income, we provide customized, flexible life insurance policies to Canadians. We help our customers understand the different types of life insurance and find the life insurance they need. Complete our quote form the Alliance Income website to get a personalized insurance quote today.