Life Insurance

Life insurance can help you feel confident that after you’re gone, your loved ones will be provided for. In addition to a death benefit, some life insurance products also provide benefits you can use throughout your life. 

What is life insurance?

Life insurance is a product that guarantees a death benefit – a payment to your beneficiaries in the event of your death – which provides valuable insurance protection that can help offset economic loss in the event of your death. Additionally, some life insurance products can grow cash value on a tax-deferred basis resulting in funds that can be used during your lifetime.

What are the types of life insurance?

Finding the right life insurance for your financial goals starts by understanding the two main types of life insurance products: 

Term life Insurance covers you for a fixed number of years, such as 1, 10, 20, or 30, and pays a death benefit if you pass away during the covered term.

Term life insurance policies offer a level premium and death benefit, and some give you the ability to convert to a permanent policy if your needs change during the term of the policy.
Term life insurance may be suitable for those who want to:

• Acquire the greatest death benefit protection for the lowest cost
• Ensure funds are available during a specific period of time to help pay expenses (e.g., a home mortgage or outstanding debt) in the event of the insured’s death
• Purchase a lower-cost protection solution with the ability to convert to a permanent policy after the term ends

Permanent life insurance is designed to provide coverage for life. Many permanent life insurance products can grow cash value that can be used during your lifetime. Permanent life insurance products include: Whole life (Participating and non-participating), Term to 100, and Universal life.

Permanent life insurance, unlike term life insurance, is more suitable for a long-term or end-of-life need. You can use it to relieve the burden of funeral costs, reduce the impact of taxes on your children’s inheritance, or create a legacy for your beneficiaries or favourite charity.

Whole life

With a whole life policy, the premium is level throughout the policy. At first, the premium you pay is more than what’s needed to cover you, so the excess premium is put inside a reserve. When you get older, the premium you pay won’t be enough to cover you, so money is drawn from the reserve to keep the policy in force. 

This means if you cancel the policy later on, the insurance company no longer needs to keep the reserve to fund the policy in the later years. So it will refund to you the overpayment of premiums, called the cash surrender value. 

Instead of taking back the refund, you can choose other options, like using the cash to buy a reduced amount of insurance or buy extended term insurance (keeps the coverage the same, but reduces the length of the policy).

Participating whole life

Participating whole life (Par) insurance lets you participate in the success of the insurance company. 

This means part of the premium goes into an account invested by the insurance company. If investment returns are good, the insurance company will pay the policy owner a dividend.

The dividend is unique in that it’s not just based on the investment return but also depends on the claims experience of the insurance company.

The most popular option is to use the dividend to buy more insurance. That way, you’re increasing your death benefit without having to qualify for it through underwriting. It’s also the most tax-efficient method of using the dividend.

You can also use the dividend to:

• Reduce premiums,
• Put it on deposit to earn interest,
• Buy extra term insurance, or
• Cash it out.

Par is a popular permanent life insurance product because of the lengthy history of dividend payments by many Canadian insurance companies. Some of them have paid dividends every year for over 100 years, even through the Great Depression, world wars, the Great Recession, and other financial crises.

The dividend accumulated inside the policy will grow to a significant amount over the years. There are several tax-efficient ways you can access the cash value to supplement your retirement.

Term-to-100

Term-to-100 is similar to whole life, except you don’t get anything back if you cancel your policy. That makes it a lot like term insurance, where you also don’t get anything back if you cancel the policy.

That’s also why term-to-100 is slightly more affordable than whole life insurance.

Like all the other permanent products on this page, you don’t have to pay any premiums past age 100.

Universal life

Universal life (UL) insurance is another type of permanent insurance with a tax-sheltered investment component.

While the investment and insurance components of Par are bundled, they are unbundled with UL. That means you get to choose your investments inside a UL policy.

You have more control over both the premium and the investment. You can even take a break from paying premiums and shuffle the cash from the investment portion to pay the premium.

Here’s how it works. You pay the insurance company a specified amount. Each month, the insurance company takes out money to cover the cost of insurance. The money left over goes into the investment account and earns a tax-sheltered return. You can choose an affordable cost of insurance option so that more of your money goes into the investment.

As for the investments, you can choose the safety of a daily interest account or be more aggressive and go with an account based on the performance of an equity index. What investment mix you choose will be based on your financial goals and risk tolerance.

It’s important to note that investments within a UL policy are not guaranteed and depending on your option, will experience the same turbulence as the stock market. It is generally better to max out your RRSP and TFSA before considering investing in a UL policy.

Speak to us today to find out what is the right fit for you!