Who needs life insurance?  You do – if you have loved ones and want to provide them with financial protection when you die.  It’s really that simple:  During your life you generate an income that supports your dependents’ lifestyle.  When your income is gone, life insurance takes over.  The proceeds from your policy can be invested to replace your income and maintain your family’s lifestyle as it was when you were alive.  Typically, insurance proceeds are tax-free and can be very useful in paying any taxes that may arise on your death.

Those simple financial facts make life insurance a necessity for most people.  But, shopping for insurance can be confusing – there are plenty of insurance companies out there offering a host of life insurance products.   Fortunately, we can simplify all that for you:  There are actually just two basic types of life insurance, permanent and term.  They can satisfy many different life insurance needs – and here, in plain language, is what they are and what they can do for you:

Term insurance may be all the life insurance you will ever need, or it may be used as an interim step before purchasing permanent insurance.  It is well suited to meeting high, short-term protection needs for the lowest initial cost.  For example, a couple with young children and/or a mortgage might select term insurance as an affordable way to obtain the full coverage they need today.  Many term insurance plans do a good job of meeting immediate needs and provide the freedom to later move, or convert to a permanent product later without providing proof of health.

Many term plans are renewable after 5, 10 or 20 years without providing proof of health.  The price will increase as appropriate for your age at renewal, and the increase in premium can become substantial in later years.  Coverage ceases for the majority of term contract once you reach the age of 75 or 80.

Permanent insurance, as the name implies, provides lifetime coverage and comes in two main varieties:  whole life and universal life. 

·         Participating (par) Whole life is the ‘traditional’ type of policy and usually the most expensive. A par whole life policy provides a guaranteed amount of insurance coverage for life and a guaranteed cash value.   Inside the policy, a reserve account keeps premium costs level for life or in the case of some policies for a pre-set period of time. The cash value of the policy is a tax-deferred fund and can grow beyond the basic guaranteed values with the addition of dividends, which are generated and paid to policyholders if the company experiences a surplus.  Surpluses are the result of investment returns, mortality and expense control being more favourable than anticipated.  

There are several choices for the use of dividends – the most popular are either to buy additional permanent coverage each year or to buy a combination of term and permanent insurance, which can make a larger amount of coverage affordable. You generally have no control over how your money is invested – the insurance company directs the investment of policy funds – and you can recover the full cash value only if you cancel the policy.  As a policyholder, you can borrow from the cash value but you will pay interest on the loan and death benefits are reduced unless loan is paid back.  On the other hand, the cash value growth can give you additional options such as extended coverage or lower premium payments.

Whole life insurance is available with a term insurance component that enhances base coverage and can considerably reduce the overall cost.

·         Universal life currently accounts for the majority of permanent insurance purchased in Canada.  Universal life insurance provides a combination of permanent life insurance and tax advantaged investment options in one policy.  As cash values accumulate, they can be used to pay part or all of the cost of your insurance or to increase the death benefit.  You select an investment mix that is as individual as you are – taking into account the amount of investment risk you are comfortable with, and your financial goals and circumstances.  This type of policy is generally for people who want to actively manage their life insurance policy.

Many people have both short- and long-term insurance needs and require varying amounts of coverage over different periods of time.  A combination of permanent and term life insurance is usually the best solution and can be combined in one policy.  Most permanent policies allow for the addition of low-cost term coverage without an additional policy fee.  This provides a way to obtain the right amount of coverage at a more economical price, giving you a base of permanent coverage that won’t increase in cost.

The type of life insurance you need depends on your lifestyle, income and overall financial circumstances.  To cut through the clutter and find the life insurance solutions that work best for you, speak to your financial advisor or insurance representative.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant. Insurance products and services distributed through I.G. Insurance Services Inc.  Insurance license sponsored by The Great West Life Assurance Company.