insurance policy for life - family of four

Insurance Policy for Life (Understanding Life Insurance)

An insurance policy for life is widely known as a life insurance policy. 

If you’re looking for an insurance policy for life but don’t know where to start, finding all the necessary information you need in making a well-informed decision on the right insurance policy can be quite challenging, considering all the confusing terms and concepts in this subject.

When looking to implement life insurance, understanding your needs is the first step in successfully securing your loved ones’ financial well-being against your financial obligations.

Life insurance is an insurance policy for life that pays out a lump sum amount of benefit in case the life insured passes away. Since no one has full control of certain life events like premature death, it is of vital importance to protect our loved ones from the financial loss that may result from such an event.  A life insurance policy is an effective risk management strategy that you can take advantage of to secure your family’s lifestyle and future.

According to a survey conducted by Bankrate, 40% of adults have no life insurance coverage. That is why we’ve made it our mission to help Canadians become financially savvy and equip them with the knowledge they need to not only reach their financial goals but also, secure their bottom line.

Here are facts you need about life insurance so you can make well-informed decisions when it comes to managing your wealth.

A life insurance policy is a contract between a customer and an insurance company. It is an agreement that the company will pay out tax-free benefits to the defined beneficiaries in case the life insured passes away during the term of the contract. 

Death is a topic that most people are uncomfortable to discuss, but it is a fact of life. That is why getting an insurance policy for life is a smart financial decision as it protects the financial well-being of your loved ones against the financial burden that may result from death.

This financial risk management tool spares the bereaved from the difficulty of the sudden loss of or reduction in the family’s income as bills and the deceased financial obligations don’t magically disappear when a person passes away.

Harsh, I know but such is the reality of life, sadly, those we leave behind have to continue dealing with our financial obligations and settle our affairs at the least in case of premature death.

With a well-planned life insurance policy, you’ll have peace of mind in knowing that your loved ones are financially equipped to maintain the same lifestyle and achieve the same future as if you never left.

Types of Life Insurance

Below is a high-level view of the types of life insurance. We have provided a brief and simple definition of each type and how they compare to each other:

Life Insurance Types

SubType

Benefits

Permanent Life Insurance

(Offers lifetime coverage)

Whole Life Insurance

(Offers guaranteed death benefits, fixed premiums, and guaranteed cash value growth)

  • It offers insurance protection for life.
  • The premium amount is fixed and guaranteed to remain the same.
  • It offers a cash value that can be used as emergency funds and/or supplement the life insured’s retirement.

Universal Life Insurance

(Flexible permanent life insurance with an underlying investment component for cash value growth)

  • This insurance offers lifetime protection.
  • Allows you to build tax-deferred wealth from within your insurance policy.
  • It is great for people who wish to continue saving when their RRSP is already maxed out.
  • It can offer protection for your estate and can serve as a source of funds for your retirement.

Term 100

(Offers lifetime protection and a fixed premium structure up to age 100.)
  • Similar to whole life, this insurance offers lifetime protection for the insured.
  • The premium structure is fixed so your rates never increase.
  • This is usually more affordable compared to other permanent policies.
  • Once approved, there will be no contract renewal as opposed to term life insurance so the premium stays the same throughout the life of the policy.
This is a perfect whole life alternative to those who wants a permanent life insurance protection but are on a budget.

Term Life Insurance

Offers temporary protection for a chosen term period.

During the policy term, the premiums paid are fixed.

In most contracts, once the term expires, the life insured can choose to renew the policy or convert it to a permanent life insurance plan.

Term 10, Term 20, Term 30 or up to Age 65, Term 40 Life Insurance
  • This allows the customer to insure their whole mortgage and will only cost then only a small amount a day.
  • Depending on the terms, this type of insurance allows you to cover large debts.
  • This insurance type guarantees that the customer can renew and convert the policy without a medical exam.
For low-cost mortgage loan protection, term life insurance may be taken out as a joint first to die policy, and combined with other types of personal insurance coverage such as critical illness and disability insurance.

Now you know what an insurance for life policy is and what it can offer. Let’s move on to the details so you can decide which is the right one for you.

Term Life vs. Permanent Life

A life insurance policy has two main types—permanent life and term life. So what’s the difference?  

Permanent life insurance offers protection for your entire lifetime. Your loved ones are financially protected as long as you live. When you pass away, the insurance company will give your loved ones the amount specified in the policy. Your responsibility is to continuously pay the premiums during your lifetime or up to when the policy is “paid up”, which is usually, 20-years.

Consider implementing permanent life insurance for financial obligations that may likely not go away. In most instances, clients get permanent life insurance to cover the cost of final expenses such as interment and taxes at death.

For more affluent individuals, they implement permanent life insurance policies to leave tax-free legacies to their next generation, leave their heirs money to settle huge tax obligations that may arise upon their demise, such as capital gains taxes on assets such as real properties, businesses, or even RRSP that the deceased may have owned, and leave tax-free money to their favorite charities.

As you may know, the best way to guarantee a breadwinner’s income is by implementing a life insurance policy with an amount equivalent to the necessary capital the family needs to earn the same income as if the deceased were still alive.

For example, a person earning $40,000.00 a year is worth at least $1,000,000.00 to his or her loved ones. $1,000,000.00 invested can realistically earn 4% of interest income annually, hence replacing the $40,000.00 annual income which would have otherwise been lost due to premature death. This is how you can leverage life insurance to guarantee your loved ones’ lifestyle and future.

$1,000,000.00 x 4% = $40,000.00

For a lot of those who actively work for income in Winnipeg, our obligation to financially support our loved ones ends when we retire, hence the need for income replacement is most often temporary in nature.

A term life insurance, financially protects your loved ones against temporary obligations such as the need for income replacement, mortgage protection, or to pay off debts. When the life insured passes away within the period specified in the contract, the designated beneficiaries will receive the payout from the insurance company. 

Term life insurance is the cheapest life insurance available in the market today. This type of life insurance gives you the flexibility to insure yourself for higher amounts and is perfect for anyone on a budget.

Going back to permanent life insurance, you may have noticed that a this type of life insurance has three subtypes on the chart we presented above. Though we briefly discussed each type above, we have published dedicated pages on each of these permanent insurance types. Clicking on the links below takes you these pages if you want a deeper understanding of each:

  1. Whole Life Insurance,
  2. Universal Life Insurance, and
  3. Term 100 Life Insurance.

Whole Life vs. Universal Life

Two of the most widely-used permanent life insurance types, are universal life and whole life policies.

For whole life insurance, the insured pays the same amount of premium for the entire duration of the policy or the policy’s contribution period. This type of life insurance includes cash values that grows compounded over the life of the policy until cashed in.

Generally, there are two types of whole life insurance policies:

  1. Participating
  2. Non-participating

Participating whole life policies participate in policy profits, which is usually issued by “mutual insurance companies”. A mutual insurance company is an insurance company that is owned entirely by its policyholders, so if you have a permanent policy with a mutual insurance company, you own part of that company.

A participating whole life insurance policy earns dividends on top of the guaranteed cash surrender values. These dividends can be paid out to the policy owner annually, can be used to purchased additional insurance, or can be used to reduce the policy’s premium amount.

A nont-participating whole policy, on the other hand, does not earn dividends, hence only benefits from the guaranteed cash values, which in most instances less profitable compared to participating whole life and universal life policies.

Universal life insurance is a flexible type of permanent insurance, depending on how you fund it, you may or may not be covered for a lifetime. This kind of life insurance recognizes that a person’s needs and available cash flow can vary, hence offers the flexibility of increasing or decreasing ones contribution amount.

There are two types of clients who may opt for universal life as opposed to whole life:

  1. A person who earns variable income, who likes the contribution flexibility that universal life offers
  2. A person who wants to take advantage of the tax-derred asset accumulation from within the universal insurance policy.

Whole life insurance and universal life insurance both accumulate cash surrender values over time. In most contracts, the insured person can use this accumulated assets to supplement their retirement income (IRP), in an infinite banking concept (whole life), or to cash out at a future time when they feel that they no longer need their coverage.

What is the Best Life Insurance Policy?

Since all of us have unique life goals, obligations and priorities, there is no such thing as “one size fits all” life insurance coverage, hence, there’s no one generic best life insurance that works for everyone.

What works for me may not necessarily work for you. Ideally, your life insurance policy should cover all your financial obligations, both short term and long term.

For many of us, our long term financial obligation is our own final expense, which in most instances, will not go away until after the person passes away. Yes, unfortunately, as human beings, we all die, death isn’t a matter of “if” but of “when”, hopefully not during our active working years where our financial obligations are at their highest.

Considering both short term and long term insurance needs ensures that funds are available at the time of need, whenever it may come. 

A small amount of permanent life insurance (either universal life or whole life), of between $50,000.00 to $100,000.00 is usually more than enough to cover most people’s long term life insurance needs, such as interment and taxes at death.

Top it up with term life insurance coverage (can be done in one policy) as a rider to cover termpoary financial obligations such as:

  1. Debts
  2. Income
  3. Mortgage
  4. Children’s Post-Secondary Education

If you’re looking to implement a life insurance policy, we can help you work out a plan that covers both your temporary and permanent needs. As Winnipeg financial advisors, we pride ourselves in delivering honest and transparent financial advisory services that puts our clients’ interest first.

Let’s talk, we can help you assess your financial risk, define what’s important to you, and together, we can come up with a carefully designed plan based on needs, situation and goals.

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