Understanding life insurance
Nearly everyone needs life insurance. But not everyone really understands what it is.
Simply put, life insurance is basic financial protection for your family. Because families are different and circumstances are different, there are many types of insurance options available.
The role of life insurance is to provide a lump sum of money (the "death benefit") in the event of your death, which can help:
- Cover your debts, including your mortgage
- Provide an income for your family
- Provide a nest egg for your family or a favourite charity
- Make sure your children have money for post-secondary education
- Provide money to pay for burial or other final expenses. Your values and needs may not be the same as those of your neighbours. That’s why there are different types of life insurance for different types of people.
Term Life Insurance – Low Initial Cost
Term life insurance provides coverage at a comparatively modest initial cost. This can be useful if you only need insurance for a short time, such as while you have a mortgage. However, term insurance premiums typically increase over time. Also, term insurance only pays a benefit if you pass away during a specified time; after that, the insurance expires and there’s no guarantee that you will qualify for a new policy. If you do qualify, the premium will probably be higher because of your older age. Term insurance does not build up cash value.
Whole Life Insurance – Build Cash Value
Whole life insurance is a good value because it can help you build cash value that you can borrow against if you need to. The premium for whole life typically remains the same forever. And whole life insurance is just that: insurance for your whole life as long as the premiums are paid. Another plus to whole life insurance is that it might be a “participating policy”. Participating policies may be eligible for dividends, if the insurer’s expenses are lower or its earnings are higher than it assumed when it set the premiums. These dividends can be taken in cash or applied to reduce your premium or taken in additional insurance or increased cash values. Dividends are not guaranteed.
Universal Life Insurance – Stay Flexible
Universal life insurance provides you with great flexibility, and the potential for savings. Each universal life policy has two parts: life insurance and an investment account. If you pay premiums that are higher than your cost of insurance and associated fees, then the rest of the money goes into the investment account. You can accumulate money in this account, typically on a tax-deferred basis.
Most universal life policies have a number of funds to choose from in the investment account. They may include funds that pay interest and funds that vary in value based on stocks. Earnings on the investment account may or may not be guaranteed, depending on what type of investment you choose.
Unlike whole life policies, universal life insurance uses current interest rates. This means that if interest rates go up, you can accumulate more money than expected in your account, and you can use that money to pay premiums. However, you also share the risk that interest rates or other investment returns may go down.
For more information
Want more information about how life insurance works? You can contact us and we will put you in touch with a friendly and experienced independent insurance representative1 in your area to assist you.
