No one likes to think about death, much less their own. Maybe you are single, or just married with no children and think life insurance is for older people with kids to think about? If you had that thought yourself, you should rethink it. Consider that the average funeral cost is in the thousands of dollars, and your partner who has depended on your income to make ends meet could be devastated financially, as well as emotionally.
Choosing life insurance can be confusing and the terminology does not make that any easier. Here’s what you need to know about available life insurance policies in Canada, in simple language, so you can make sure those you care for are protected. You may be surprised how you benefit from it even while you are alive.
Term Life Insurance Policies
This is one of the most popular types of policies for good reason. It lasts only for a specified number of years, and if you live past that date, then it expires without a payout.
Term life insurance is suitable for most people. It lasts for a specific number of years. If you don’t die within the time frame specified in your policy, it expires with no payout. You must make two decisions when considering term life insurance:
- How much do you want?
- How long do you want the coverage to last?
On the plus side, it is the cheapest type of life insurance you can get. The downside is that if you outlive the policy, there is no extension. You must purchase another policy, and depending on your age and health you could pay more to get one. Policies are considered “small” policies if they are under $60,000 in coverage. Most people get term life insurance for between five and 30 years. Unlike other policies, you can “lock in” your premium rate, which means if interests rates change your rate remains the same. To do this you must opt for the “level premium”. The regular premium can change each year. You can also opt to purchase an extremely short term life insurance, called annual renewable. This is a one year policy that can be renewed at the end of each year. The only reason you would want to opt for this one is if you want to remain covered while waiting for an employee offered policy to kick in.
Whole Life Insurance Policies
Whole life policies are different from term life insurance policies. Whole life has an actual cash value that builds over time. The good news is you can take a loan out against this policy once there is enough value in it. Some use it to cover large expenses such as additions to a home or college. The best news and the largest difference between whole and term is that whole life insurance policies do not expire. If you like to “set it” and “forget it”, then this is the perfect type of life insurance for you. Your premium never changes and you have a guaranteed rate of return without impacting your death benefits. It costs more than term life insurance, but it could be worth it to you.
Universal Life Insurance Policies
Universal life insurance is a variation of whole life insurance, and sometimes goes by the name guaranteed universal. The biggest difference is that it has zero cash value, so you cannot borrow against it. Like the whole life policy it offers death benefits and coverage, and your payments are locked in. If you are typically good at paying your bills on time, then this may be the product for you. It is cheaper than regular whole life insurance, but the catch is you must pay on time, every time. With most policies if you miss one payment, or are late, your policy could be canceled. Then you walk away with nothing.
Indexed Universal Life Insurance Policies
If you follow the stock market in Canada and like to invest, you can do that with your life insurance policy too. The indexed universal life insurance policy is another variation of the whole life insurance policy. In this case the policy’s cash value is linked to a stock market index. Your policy’s cash value could grow if the market does well, and conversely offer you zero rate of return if the stock market does poorly. Why would anyone want this? With this product you are able to access the cash value, any time. Payments and death benefit amounts can be adjusted at any time and are flexible. There is a limit on the amount of money that can be gained from the stock market as the government sets a cap on this.
Variable Universal Life Insurance Policies
This type of insurance product is much like the indexed policy, but instead of using the stock market it uses bonds, equity accounts and money markets. With the universal life insurance policy there is the possibility for some large gains in cash value, and you can take loans against it. The downside is that you must be comfortable being hands-on when managing the policy. The cash value can change every day and many fees and administrative costs are taken from your payout. Premiums are flexible as are the death benefits. Most experts suggest obtaining the services of a financial advisor before considering a policy of this type.
Other Terminology You May Find Helpful
It is a whole new world and a whole new language when dealing with insurance policies. Here are some of the more common terms you will hear in the course of making your decision.
- Underwriting: This means how much of a risk you are to insure. The lower the risk, the lower your monthly payment.
- Fully Underwritten: This is a term that means you are a very low risk candidate and therefore will get the lowest monthly rate. A policy that is issued under this title means you have no pre-existing conditions and are healthy.
- Simplified Issue: If you are offered this type of insurance it means the medical exam has been waived.
- Guaranteed issue: No medical exam, no questions and everyone is accepted. It is also the most expensive type to purchase. Many of these types of policies have exceptions attached to them. For example, if you die within a few years of getting the policy, then your beneficiaries may only receive partial payouts. Only buy this type if you have been turned down for all other types.