Life insurance has many benefits including replacing your income when you finally die so that your dependents do not have to suffer. When you buy life insurance, you are simply entering into a long term commitment to pay premiums – recurring amount of money as per agreement. The death benefit will be paid out for most causes of death including accidents, illness, or simply natural cause. If you are to die while the policy is still active and foul play is not suspected, a tax-free sum of money is paid by the insurance provider to your beneficiaries. Your beneficiaries will in most cases be your family members who get an income replacement to cover bills such as food, housing, and other expenses. The death benefit can be used by your beneficiaries as they wish.

Different types of Life Insurance

Life insurance is categorized into different types: term life insurance and permanent life insurance. Term life insurance is the most popular with people since it provides much needed coverage at a favorable price. The total cost of life insurance is dependent on the amount of coverage purchased, the duration of the policy, and the likelihood of death while covered by the policy. Ensure that you have gotten sufficient coverage to prevent the risk of your loved ones becoming liable for your debts or unable to have a comfortable standard of life.

Term Life Insurance

How does term life insurance work? Term life insurance provides basic coverage for a predetermined period of time after which you stop paying premiums and coverage expires. It is the most affordable type of life insurance and offers simple coverage.  If you die during the term of your policy, the insurer will pay out the death benefit to your beneficiaries.  On the other hand, if you outlive the term, you end up getting nothing from the insurance company.

Permanent Life Insurance

Permanent life insurance differs from term life insurance in that you pay premiums for the entirety of your life. As long as you are paying your premiums at the point of death, the insurance provider will pay out the death benefit to your beneficiaries.

Most permanent life insurance policies will have a cash value component that earns you interest and increases in value as you continue paying your premiums.  The cash value component may either increase the death benefit pay out or in rare situations provide a dividend on the accumulated cash value. Additionally, you can withdraw money from the cash value and even take out a loan using the cash value as collateral. However, in both instances, it will reduce the death benefit payable to your beneficiaries. Visit WEALTHinsurance.com for more information on the cash value component.

Permanent life insurance is further categorized into the following options: whole life insurance, variable life insurance, universal life insurance, and variable universal life insurance. How does life insurance work in each of these options?

  • Whole life insurance – this option happens to be the most popular of the permanent life insurance types. It has a cash value component that grows at a fixed interest rate set by the insurance provider.
  • Variable life insurance – you will pay fixed premiums and have the choice to choose the type of assets you want to invest in. Where the chosen assets fail to outperform the value of the death benefit, you will not notice any difference in your coverage.
  • Universal life insurance – the cash value in this option is tied to specific stock index used by the insurance provider. The cash value will decrease if the market underperforms and you may have to pay higher premiums to meet your coverage amount.
  • Variable universal life insurance – it is a combination of two options whereby the adjustable premiums of universal life insurance are applied to the diversified assets of variable life insurance. The premiums payable will decrease or increase depending on how your investments are performing.

How Does Life Insurance Work In Canada: Who Qualifies?

Are you married? If you are married or in a partnership, you require life insurance even if there are no kids yet.  In some instances, you will have co-signed a mortgage, credit cards, or auto loan which may place your spouse/partner at risk of losing an asset at the point of death due to challenges with loan repayments.

The death benefit from a life insurance cover will help to provide a comfortable standard of living, honor loan repayments, pay bills, provide money for end of life medical expenses, and meet funeral costs.

Do you have children? If your family is reliant on you for financial support, you need life insurance to cover expenses after you die. Your death may result in loss of income for the family and mounting expenses such as home and child care. The cost of raising a child can be humongous keeping in mind that they rely on for food, housing, clothing, and many other needs including college tuition. In your absence, the life insurance policy will ensure that your loved ones are financially protected and can maintain a good standard of living. Finally, remember that your children cannot be named as beneficiaries of your life insurance policy without having to use a complex loophole in financial law. It is prudent to name your spouse/partner or legal guardian as beneficiary to your policy.

Are you single? One common misconception among people is that being young and single doesn’t qualify you for life insurance. Even single people need life insurance since life circumstances change such as starting a family or taking up a mortgage. The earlier you are able to get life insurance, the cheaper it becomes for you. How does life insurance work Canada? Life insurance policies become less affordable with advance in age and worsening of health which is related to increased risk of death. Additionally, the death benefit may help pay off debts if you had student loans or had a business loan and can even serve to meet end of life medical bills and funeral expenses.

The rule of thumb when getting life insurance is to get sufficient coverage to meet future day-to-day expenses, pay outstanding debts, and meet end-of-life bills while providing a term length that lasts long enough to see off your longest financial obligation.