Thinking about getting life insurance? It’s a great way to help financially protect your family.
Unlike health insurance, which generally speaking pays out when you get sick, life insurance pays a tax-free cash benefit to your family or beneficiaries when you die. They can then use this money for any reason, such as covering the cost of:
- a mortgage or
- any other living expenses.
Some Canadians have a life insurance policy they purchased on their own, while others have group life insurance provided to them as an employee benefit. And some choose to top up their group plans with individually purchased life insurance.
With that in mind, you must also consider that there are different types of life insurance. The big four are term life insurance, permanent life insurance, participating life insurance and universal life insurance.
But which one is right for you? To figure that out, it helps to have an understanding of what each type of insurance has to offer.
How does term life insurance work?
Term life insurance is a relatively inexpensive form of life insurance that provides protection over a pre-defined period of time. But it’s important to note that it does get more expensive as you get older.
Typically, people purchase term life insurance to protect their dependents during times when they have significant financial obligations (like a mortgage, for example).
Let’s say you owe $400,000 on your mortgage. Holding half-a-million dollars’ worth of term life insurance for a period of time would help prevent your family from experiencing real financial hardship if you died. They can use the money from the death benefit to help cover some or all of the mortgage.
How does permanent life insurance work?
Permanent life insurance provides guaranteed lifetime protection. It’s more expensive than term, but your premiums remain constant.* So at a certain point in your life it will be cheaper to pay for your permanent life insurance than it would be to buy additional term insurance.
(*A premium refers to the annual or monthly fees you pay for having insurance. Most permanent life insurance products come with premiums that are guaranteed to remain the same. But please note that some permanent life insurance products are adjustable. That means their premiums may change over time.)
- Is permanent life insurance right for you?
- Term life vs. permanent life insurance: What you need to know
How does participating life insurance work?
A participating life insurance policy — which is a kind of permanent life insurance — can provide the policy owner with dividends.
You can use the dividends to buy more coverage, take a cash payment or decrease your annual premium. Or you can choose to save the money with your insurer and earn interest.
Over the long term, you may be better off owning permanent than you are continually renewing term insurance.
How does universal life insurance work?
Universal life insurance is more complex. In most cases, it provides consumers with lifetime (or at least long-term) protection while at the same time making possible tax-deferred* savings.
(*Tax-deferred means you won’t have to pay tax on any investment growth within an account until you withdraw funds.)
Some universal life insurance products feature premium payments that remain constant over time. Some require payments that rise over time. And others combine both.
What about payments made over and above the cost of the insurance? They can be invested and your savings will be held on a tax-deferred basis.
What type of life insurance is right for you?
Personally speaking, for me, permanent life insurance plays a fundamental role in my family’s financial plan. I’m lucky enough to have group life insurance, and I’ve topped that up with additional permanent life insurance I bought myself. I also added term life shortly after my spouse and I bought our first home together. We’re covered for about twice the value of what we owe on our mortgage.
Why do I have so much life insurance? Partly because as a 20-year-old, I saw first-hand what happens to a family when a parent dies (we lost my mom to a heart attack at 44). Mostly though, this is simply a matter of how I think about and manage risk.
- 3 reasons to get life insurance in your 20s or 30s
- Is it ever too soon or too late to buy life insurance?
- Calculate how much life insurance you might need to protect your loved ones with this life insurance calculator.
The right life insurance product for you depends on your personal situation, needs and goals. There might not even be one type for you. For instance, you may find that you need a combination of different life insurance products.
This is where it helps to talk to a professional, like an advisor, for guidance. An advisor can take a look at your financial and lifestyle habits to help you determine which type of insurance meets your needs. They can also:
- explain life insurance products in further detail (I’ve only scratched the surface here on how these products work),
- help build insurance into your overall plan,
- answer questions you may have and
- address your financial concerns.
Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.
Read more about life insurance:
- What your family needs to know about your life insurance policy
- What type of life insurance do you need?
- How much life insurance do you need?
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.