Life Insurance: A Beginner’s Guide

Insurance

This blog post will give you an overview of the different types of life insurance policies and what can be expected from them. This way you can learn about the policy type that is right for you.

Generally, there are two types of life insurance: term and permanent.

Term

Term life insurance is the cheapest option; you are only covered for the period of the term that you purchase. However, you do have the option to convert it into permanent life insurance, even if your medical condition changes, usually until the age of 70. Once the term finishes, life insurance renews automatically, typically at a very high rate compared to the initial term. All renewals stop at the age of 80-85. In other words, this is like leasing a car or living in a rental apartment: it is cheaper and better suited for shorter periods of time.

Term 100 is a little different than that of regular term life insurance. It covers you until the age of 100 at the same unchanged premium rate. It is a bit cheaper than a permanent life insurance policy, since it does not have a cash surrender value. Once you reach the age of 100, the policy terminates. As a result, if you live one extra day after turning 100, your beneficiaries will not receive a payout from the policy.

Permanent

There are two standard types of permanent life insurance: whole life insurance and universal life insurance. These policies are created to stay with you until your last day, so your beneficiaries will receive some money after you are gone. You can look at it as your gift to those who remain after you go. One way to look at it is to view it as like paying a mortgage for your house or financing your luxury car. It has a value. As a result, its premium is much higher than any term insurance, since it is guaranteed to leave some money to your beneficiaries.

My favourite type of life insurance is whole life insurance. It has three guarantees: guaranteed death benefit, guaranteed cash surrender value, and guaranteed premium. The premiums for whole life policies can be paid either throughout your whole life or it can be paid for in a shorter duration, for example, within 20 years. This policy would be labeled as Pay 20. It is similar to paying accelerated mortgage payments every month, so you pay off the remainder faster.

A few words about cash surrender value: this is the nominal cash value that is accumulated within your whole life insurance policy. There are only three options to use this nominal value:

1. If you want to cancel the policy, you receive this amount as the compensation (a certain portion of it may be taxable);

2. You can use this value as collateral for borrowing money from an insurance company or a bank;

3. You can withdraw a part of the cash value, of which the death benefit will be reduced.

The other type of permanent life insurance is a universal life policy. The premiums that you pay go into policy funds and are then invested in various mutual funds or Guaranteed Investment Certificates (GICs). The cost of insurance and the administration fees are withdrawn from this fund monthly. If, by accident, the investment funds collapse and there is not enough money left to pay for the cost of insurance and the administration fees, the policy will lapse or you will be asked to pay a higher premium. So, although it is considered a permanent policy, the premium rate is not guaranteed to stay the same.

Life insurance is ultimately the product of LOVE! If you love your family, you will want to take care of them even after you pass away. Sometimes it is interesting to hear that somebody does not believe in life insurance because there is nothing to believe in. It is simply a way to leave your family some money to take care of themselves after you are gone, especially if you are leaving unpaid mortgages, credit card debt, loan debts, and/or a spouse with small children without any income. With this in mind, it is a no-brainer! You just have to have it!

If you would like to learn more about life insurance and the different type of policies, you can always call one of our licensed brokers at 905-886-7277. We are looking forward to your call!

This article was contributed by: Stan Dubinsky, Ph.D.

Stan is a registered insurance broker at PrimeService Insurance. He can help you find the best auto, home, commercial, travel, and life insurance policies to meet all of your insurance needs.

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