What Types of Life Insurance Do I Need
Canadians are fortunate to have a wide variety of insurance vehicles available. These plans can cover everything from basic health and dental coverage to disabilities, illnesses, long-term care and, ultimately, death. The range of options can often be overwhelming.
Let’s look at some of the more common types of insurance policies.
LIFE INSURANCE
Term
Life insurance is essential for those who want to prepare for the unexpected. It serves as a cushion to surviving loved ones who will have to deal with the financial impact of an individual’s sudden passing. Beneficiaries usually get a tax-free lump sum from the life insurance company when that happens.
Term life insurance covers you for a specific period of time, for example, 10 or 20 years. Compared to a permanent policy, the cost of term insurance tends to be less expensive, allowing you to purchase more significant amounts of coverage.
At the end of the term, you have several options, like cancelling the policy if you no longer need the coverage, renewing the policy, likely at a higher rate, or converting to a permanent policy.
Permanent
Term insurance is commonly used to cover shorter- term expenses in the event of an unexpected death (i.e. mortgage, income replacement etc.). In contrast, permanent insurance is often used in estate planning (i.e. estate taxes and wealth to the next generation).
Choosing which term insurance policy is pretty straightforward and often comes down to the least expensive policy. Permanent plans are not always as clear, and it is essential first to understand your objective for the policy to ensure you move ahead with the right plan.
The three most common plans are:
Term to Age 100
Whole Life
Universal Life
The complexities of whole life and universal life are beyond the intention of this article; however, it’s worth noting that both include investment opportunities within the policy.
Unlike Term to Age 100, where the policy is in force as long as premiums are paid every year, whole life and universal life can be set up, so payments have a predetermined number of years, essentially pre-paying in the first 10 to 20 years for example.
There are more complexities to permanent policies, and it is critical to work with an experienced, insurance-licensed advisor.
DISABILITY INSURANCE
Disability insurance policies provide a tax-free monthly payment intended to replace a percentage of your lost income if you cannot work. Many companies have disability plans for their employees, but you may decide to enhance that with a policy of your own.
Disability policies are complex, and it is imperative to understand the details of your policy before making a decision. It is recommended to meet with a licensed insurance advisor who can outline the differences in coverages, features, waiting periods etc., so you end up with a policy that best suits your needs.
CRITICAL ILLNESS INSURANCE
Critical Illness policies also provide a tax-free payment; however, instead of monthly payments during the period that you’re unable to work, like disability insurance, this payment is a lump sum paid to you shortly after being diagnosed.
These policies cover a variety of illnesses, but generally cover conditions like cancer, stroke or heart attacks. What you do with the lump sum is entirely up to you; however, the funds received are often used to cover expenses including medical costs, travel costs for treatment, domestic support during recovery, and covering mortgage and utilities for some time.
As they are very different in many ways, clients often have both disability and critical illness policies to take care of the large influx of upfront costs and provide peace of mind during their recovery.
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So how do you know which type of insurance is right for you? How much coverage do you need?
Policy premiums, eligibility, and benefits are affected by your age, gender, family medical history, immediate family needs, financial situation, and so many other factors.
Your best option is to meet with your financial advisor and work on a needs analysis to ensure your present and future needs are met. There are many options available to you to provide protection and peace of mind for you and your family, which is the best investment of all.