Overview of Term life and Permanent Life Insurance

Canadians have heard of term life and permanent universal and whole life insurance, but this is only the beginning. Because life insurance is such a deeply developed industry, it's very difficult for the average Canadian to know exactly what's available or what they can do with it. Between stringent qualifying processes and the large differences from person to person and product to product, it's impossible to say with any authority if any single insurance policy is best for all Canadians. Because of this, people tend to buy without knowing all the pertinent details and end up wasting money that could otherwise have been put to work for them.

For most Canadians, the process of obtaining life insurance starts somewhere in between referral from a friend, and having a company they already deal with offer it to them. Unfortunately, neither of these scenarios start consumers out on the right track, as these offerings are, by their very nature, limited. What if your insurance policy could be used for tax advantaged investing? What if you could transfer your estate to your children without taxes eating away at everything you've worked for?

The good news is that it's not so hard to find the right coverage and investment plan if your financial planner knows his business. There are a wealth of insurance products in Canada that will be better fits than your run of the mill life insurance policies.

Term Life Insurance

Term life insurance is the best way for people to get cost-effective, temporary coverage. It's an excellent way to cover shorter term financial obligations like dependant family members, personal or business loans, and even mortgages. Term life insurance is purchased for a specific term between five and one-hundred years. They're typically renewable and convertible, which gives the policy owner the option to renew it prior to its expiry or to convert it to something more permanent like whole life or universal life insurance.

Here are some example quotes for some common scenarios with a $500,000 face value (policy amount):

Universal Life Insurance

Universal Life Insurance (UL) is one of the most flexible types of insurance policies in Canada. Unlike Term life insurance, UL is a permanent type of life insurance, meaning that the policy will last until the policy holder's death. One of the major features of Universal Life is that your payments to it contribute to a policy cash value, which in turn, gains interest. The problem with putting a price tag on each of these policies is that they're investment products as much as they are insurance policies. The size of the monthly payment depends heavily on how much a policy holder intends to invest.

Universal Life insurance policies are a combination of life insurance and investment. There are significant tax advantages to be had by wrapping investments into an insurance policy. This is called tax-deferred investing. One analogy commonly used is that of a farmer: Would you rather be taxed on the seeds or the harvest? It's far more tax efficient to tax the harvest, because you'll be able to grow and compound a larger amount. Moreover, down the road, a policy can be leveraged with a bank or lender, to take out a mortgage using the policy as collateral.

The one thing that these policies do have in common though is the Cost of Insurance charge associated with the policy. The Cost of Insurance charge is the basic cost of insurance, which is based on a number of risk tables, particularly health and habits. There may also be a minimum contribution to the cash value (investment). We highly recommend talking to a financial planner or insurance broker before making any decisions about a Universal Life policy.

Click one of the example categories below to see some of the minimum payments available on $500,000 universal life insurance policies:

Whole Life Insurance

Whole Life Insurance (WL), like Universal Life Insurance, is an investment product as well as an insurance policy. The major difference between WL and UL policies is who sets the premium, and how far into the future investment rates are projected. Whole-life insurance is a more mature line of insurance policies based around the idea of providing stable, long-term investment opportunities and life insurance to consumers. For these policies, providers take a look at long-term projections for interest rates to determine the appropriate premiums for policies so they can be cashed out after a predicted period of time.

Because Whole Life policies are based on the long-term, they're not very sensitive to shorter term increases in interest rates. In the past, pressures in the marketplace due to increasing interest rates made whole life insurance policy holders think twice about the returns they were getting in their whole life policy investments. This lead to a new concept in the industry, known lovingly by Canadians as: Buy term and invest the difference. The crux of this idea is that consumers can pay small Term Life Insurance premiums, then build their "cash value" seperately through another investment vehicle. While this idea is very effective for some, it's not something for everyone.

Due to its long-term outlook, Whole Life offers some level of insulation for the policy holder from the dangers of a fluctuating market. A period of decreases in interest rates, for example, will not generally affect the ability of the holder to cash out their intended amount for retirement or other purposes. Whole life policies are extremely useful for clients that want to guarantee meeting a financial goal without too much maintenence.

Here are some examples of some minimum payments for $500,000 whole life insurance policies:

Summary

The three major life insurance types are Term Life, Whole Life and Universal Life. Each has their advantages and disadvantages. Term life is usually the least expensive in the short-term, and it can be utilized to provide temporary coverage for a lot of financial obstacles. Term life doesn't have any investment component and can be more expensive over a lifetime. But lack of investments notwithstanding, one may follow the idea of buying term and investing the difference to successfully build a large amount of money. Universal Life and Whole Life, unlike Term, are permanent life insurance policies. Universal life has more flexible premiums, and uses shorter-term financial projections and a wide array of investment choices to help your policy respond to market changes. Whole-life, on the other hand, has more rigid premiums, uses longer-term financial projections and can insulate your investment from market changes.

Which policy is right and how much it costs depends a lot on your short- and long-term financial goals. It might come down to your family situation, affordability, time to retirement, or what you need coverage for, but it's rarely a decision made soley on the price of the policy. There's a lot to consider, and to make the best choice, we highly recommend that you take an opportunity to sit down with your financial adviser to determine what's right for you.

If you'd like to talk to a professional about your options, please don't hesitate to contact a CanEquity broker. You can do this by clicking 'Get a Quote' next to one of the policies above, by filling out our 30 second contact form (link below), or by calling us directly at 1-877-453-0033.