Here are some tips for sifting through the options and making your application.
Life insurance can seem equal parts dull or morbid. But it doesn’t have to be complicated.
And it’s important to grasp the basics, particularly if you have a partner or children who depend on your income.
You probably don’t need life insurance when you’re single. But once you start a family, you need to get enough coverage to help your loved ones pay the mortgage, make car payments, afford daycare and save for university, just in case you die sooner than you expect.
When you have people and assets to protect, life insurance provides you with an important perk: peace of mind. Hopefully, your family will never have to collect on your policy, but it will be there if they need it.
Here’s the deal: In exchange for regular payments during your life, an insurance company you choose will guarantee that a predetermined amount of money will be paid out to your loved ones after your death.
Formally called a death benefit, this payout will help cover their cost of living after you pass away.
Life insurance is mostly designed for people with dependents, but single people can buy some, too. You might need $10,000 or more to pay for a proper funeral and save your parents, friends and siblings from bearing that burden.
Plus, your loved ones don’t have to report life insurance payouts as taxable income; they’re basically tax-free.
Before you buy a policy, online or in-person, there are some terms you need to know:
Term life insurance covers you for a specific period of time, usually in ranges of 10 to 30 years.
So, when you get a policy with a 20-year term, the insurance company will pay your beneficiaries if you die within the next 20 years. With most term policies, your premiums won’t increase during that time.
Term life insurance is the most affordable option. However, signing up later in life would lead to much higher insurance costs, because your risk of dying is higher.
This is a great option if you feel you only need coverage for a set period — say, until the home is paid off and the kids move out.
Many term policies can be converted to permanent policies. And keep an eye out for “unconditional renewability,” which means you don’t need to take another medical exam if you decide to start another term.
Permanent or “perm” life insurance provides lifelong coverage. Like term life insurance, your premiums are typically locked in — but they’ll be much higher at first. Maybe even 10 times higher.
After all, you will die someday, so as long as you keep your policy active, the insurance company will eventually have to pay out. And you might be locking in your rates for 70 years, not just 10 or 20.
There are three main types of permanent life insurance coverage:
Don’t be thrown by the word “term,” as this uniquely Canadian product is a form of permanent policy.
Your premiums stay the same until you turn 100 years old, at which point your coverage becomes free.
Unlike other permanent policies, Term to 100 policies don’t have a cash value or investment component. They’re the simplest, purest form of long-term coverage you can buy.
Your premium pays for your insurance coverage, plus an investment portfolio that can grow your money over time. The insurance company manages that portfolio, aiming for low risk and moderate growth. Those investments are also sheltered from tax.
Whole life insurance policies can be “participating” or “non-participating.” With a participating policy, you’ll share in the company’s profits in the form of dividends, which you can cash out, use to pay your premiums or boost your death benefit.
Lastly, your premiums and earnings will slowly increase your policy’s “cash surplus value” over time.
There are two ways to use this value. First, you can use it as collateral in a low-interest loan. You’ll be given a sum of money no greater than your cash value and agree to give up some of your death benefit if you don’t repay what you owe. Second, you’ll be able to get most or all of that cash value back if you decide to cancel or “surrender” the policy.
While universal policies have plenty in common with whole life policies, they provide more investing freedom. In fact, these participating policies act more like investment accounts with a life insurance component.
Instead of paying regular premiums, you can invest as much as you want in your account, and you’ll have the freedom to manage those investments as you please. Your insurance company will then deduct the cost of your actual life insurance from the account on a regular basis.
Rather than being locked in, you have the ability to increase or decrease your premiums (and death benefit) as you wish, according to your budget. In addition to borrowing money through your policy, you can treat it like a savings account and pull out cash if you need it — though you’ll have to pay income tax on your withdrawals.
Because these policies offer lots of choices and are sheltered from taxation, wealthy Canadians often use them to invest once they’ve maxed out their TFSAs and RRSPs.
The Government of Canada suggests most people should get coverage worth seven to 10 times their annual salary. But you’ll want to look at your particular situation.
You need to account for all your debts (including mortgages and student loans), your family’s annual expenses (such as child care, groceries and transportation) and your funeral costs to get a solid estimate.
When buying term insurance, think about where you are in life.
If you’ve just had a baby, you’ll want at least a 25-year term in case you die while your kid is still in school. Or if you just bought a house with a 15-year mortgage, a term of at least 20 years will help your partner make payments on their own, even if you refinance and choose a longer amortization.
If you can’t afford the coverage you think you need, pick the option that fits your budget. As long as you get a flexible policy, you can always increase your coverage once you have more free cash.
Whether you’re buying term or perm insurance, you’ll likely have to fill out a health and lifestyle questionnaire and complete a medical exam to qualify. This fact-finding process is called underwriting.
Just as your debt habits determine your credit score, your bill of health defines your insurance status. The healthier you are, the more offers and better terms you get.
And remember, honesty is the best policy. Your loved ones won’t get a cent if you lie about your health and break the terms of your contract.
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