Life insurance in Canada can be categorized into two types:
Permanent Life Insurance. Other names for permanent life are whole life or straight life insurance. Whole life insurance policies usually have cash value and provide coverage for the rest of your life.
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- Policies eventually pay a death benefit as long as the policy is in force
- Higher premium rates in the beginning, but reduce as the age of insured goes up
- The policy would be able to pay debt, taxes, etc. to be paid at death
- Can be used as an investment vehicle
- Policy usually has a cash surrender value
Term Life Insurance is a basic form of life insurance with no cash value and provides coverage for a set amount of time known as the policy period. If you or any other insured survive past the expiry date of the term life insurance no benefit would be paid and the life insurance policy expires. Some Term life policies have an option to renew without having to redo the medical exam.
- Term life insurance policies are usually issued for terms ranging from one year to 20 years and even until age 65.
- Beneficiaries collect a death benefit only if the life of the insured expires before the policy end date
- Term life premiums are more reasonable
- The policy has no cash surrender value
- Typically offers non-forfeiture options
- Proceeds to a Beneficiary at death are tax-free
Advantages of Term Life Insurance
- Offers pure protection
- Insurance premiums are usually low, especially for young insureds
- Lower premiums allow being designated for other financial instruments such as RRSP, RESPs or investments
- Term life insurance policies can be renewable or converted into a permanent policy allowing future flexibility
- Can be used to secure repayment of a loan should the borrower die
Disadvantages of Term Life Insurance
- Premiums may become unaffordable as you continue to age, especially at 65 years of age and older
- Increasing premium at a later stage of life force some people to let their term lifer insurance lapse
- Term life insurance does not have a savings or investment component thus not allowing the owner to continue the policy with the built-up equity, especially in times of financial hardship
Permanent Life Insurance
Permanent life insurance shares the following attributes:
Coverage is based on the duration of the insureds life, as long as premium payments are made.
Premiums higher in the beginning but become more affordable as you age. The policy owner pays more than required in the early years, an excess, called cash value accrues in the policy. The cash value represents a savings element built into the permanent life insurance policy.
- The amount of cash value depends on:
- The face value of the life insurance policy
- How long the policy has been in force
- The length of the premium payment period
Advantages of Permanent Life Insurance
Permanent life insurance has cash value liquidity. The equity can be used to borrow from the life insurance company, use as collateral for a loan, or simply turned in for their cash surrender value.
Permanent life insurance is considered to be a safe investment. Permanent insurance provides reasonable growth at a guaranteed rate, plus the cash surrender value is also guaranteed in some policies.
Disadvantages of Permanent Life Insurance
Permanent life also has its disadvantages. Permanent life insurance premiums are usually higher in the early years compared to term life insurance policies. A higher life insurance premium in permanent insurance reflects the higher probability of a claim being made considering the policy will remain in force for the lifetime of the insured. Term life insurance does not make that presupposition.
Whole Life Insurance
Whole life insurance can be categorized into two types, Adjustable whole life insurance, and Universal life insurance. Both types are “interest sensitive” and have both life insurance and an investment component. Additional premium deposits may be necessary for response to investment rate fluctuations. Both types of life insurance policies can be considered a hybridized version of permanent and term life insurance. The development of adjustable whole life and universal life insurance was a direct response from a perception that traditional life insurance didn’t offer more flexibility and high enough ROI from company profits.
Adjustable Whole Life Insurance Policies
Adjustable whole life insurance was developed to give policyholders further premium reduction capability by allowing to change the premium rate at prearranged periods, based on the interest rate and mortality levels. This was seen as a way to reduce premium payments when interest rates were favourable to the policyholder. The result was the adjustable permanent life insurance policy. Adjustable whole life insurance policies are not marketed often today as the product wasn’t favourable for the life insurance company due to lowering interest rates.
Universal life insurance Canada
Universal life insurance in Canada was developed as a response to a market perception that traditional life insurance policies were lacking flexibility and also that life insurance companies were not sharing the return on investment proportionally with the policyholder.
Universal Life Explained
Universal life insurance is not easily categorized as premium payments are neither rigidly scheduled nor guaranteed. Universal life policies are self-directed by the policyholder but payment structure can be varied by the insured or by the insurer. Factors such as mortality rates, company operating expenses can either increase or decrease premium payments.
The Death Benefit is guaranteed in a Universal Life insurance policy, as long as premium payments continue to leave the policy in force. The equity in the policy can also be used to pay down premiums or increasing insuring expenses so that the policy does not lapse.
Cash Surrender Value of Life Insurance
Cash surrender value on a life insurance policy represents the cash value, less surrender charges, outstanding balance from policy loans and unpaid premium.
Cash surrender value means there’s a savings element to a life insurance policy that can be used as collateral to help when trying to borrow money from banking institutions, or a loan from your life insurance carrier.
Cash surrender values can also be used to offer greater flexibility to the policyholder by using the savings element of the policy to generate a non-forfeiture value. The non-forfeiture value, or the savings in your policy, can be used to sustain and keep your life insurance in force should you not be able to keep with your scheduled premium payments.
Joint Life Insurance Canada
Joint life insurance policies in Canada insure the lives of two or more people but pay only one death benefit. The death benefit is advanced when either the first or last person expires.
There are variations of Joint life insurance policies such as:
Joint first-to-die life Insurance – policy pays only one death benefit at the time of the first death
Joint last-to-die-life insurance – policy pays only one death benefit at the time the last person dies
Joint life insurance policies have advantages in that they are cheaper than individual life insurance, but more than the cost to insure one person.