A lot of people do not like talking about life insurance. The idea that someone would pass away is not always a fun conversation, but it is an important one.
Life insurance is a very large topic. It has all different types of policies that can seem overwhelming to people. Furthermore, people often think it is too expensive to have.
It is important for people to gain a better understanding of this type of asset, and how it is helpful. Some people sign up for Accidental Death Insurance, assuming that it covers the same things.
However, this is not true at all. Both terms are different and do not replace the other. To help readers gain a better understanding, the following will explain how these two terms are different.
What is Life Insurance?
Life insurance is a contract being the insured, and a life insurance company. The insured agrees to pay a premium over time, and the company promises to pay a lump sum at the time of their death.
Life insurance covers all causes of death, so long as the individual has been honest about their health and habits at the start of the policy.
Policyholders take medical exams for coverage. This tells insurance companies that the person is as healthy as they state they are. Policies can take effect within a few days or weeks.
Types of Life Insurance
There are two types of life insurance: Term life and permanent life insurance.
Term life insurance is the most simplistic and most affordable option. Coverage is only temporary. People choose a specific term that can be anywhere from 5-100 years of coverage.
There are additional options or “riders” that can come with term life insurance. However, these options do make premiums more expensive.
Some riders include renewable term life and level term life insurance. Renewable is meant to renew the policy every year, while level term ensures that premiums never rise or fall.
Permanent Life Insurance
Permanent life insurance is a policy that covers a person until they reach the age of 100. Unlike term life, permanent comes in a range of coverages including Universal Life, Whole Life, etc.
With the range of options, people have more flexibility when it comes to their coverage. They are also able to take part in investment opportunities and to gather a cash value that accumulates over time.
Because of the larger array of options, permanent life insurance tends to be more expensive. Those who are interested in a death benefit, as well as the potential for extra income, might consider this type of coverage.
|Term Life ||Permanent Life |
|Affordable and simple||Expensive, more diverse|
|Covers a specific term||Lasts until death|
|Offers death benefit||Offers death benefit plus the potential for investments and cash value|
|Payout only occurs if the insured dies within the term||Always payout|
|Low premiums for the young and healthy||Young and healthy receive lower premiums|
|Renewing can be expensive||Never need to renew|
|Can convert to permanent life||Cannot convert to term life|
What is Accidental Death and Dismemberment?
In comparison to life insurance, accidental death and dismemberment (ADD) pay a lump sum only if the insured dies of an accident. Additionally, partial payouts are made if the insured loses one or more limbs.
A person who dies of a natural cause, disease or illness will not receive any type of payout.
Oftentimes, insurance companies will sign people up for ADD without including this kind of information. Not surprisingly, it’s easy for these policies to go through since they require no medical exam or underwriting.
Generally speaking, insurance agents get a quicker payday without really benefitting their client.
Important to note is that this coverage can, in fact, be added to traditional life insurance. This way, if the insured dies of an accident, they payout will be doubled.
This kind of coverage may be beneficial, considering accidents are ranked 5th in the leading causes of death in Canada. Above accidents were Cancer, heart disease, stroke, and chronic lower respiratory diseases.
Pros and Cons of Accidental Death and Dismemberment
|Inexpensive premiums||Only pay if death occurs by accident|
|Covers fatalities and critical injuries from an accident||Will not pay out if the insured dies on the operating table after an accident|
|Can be added to traditional policy||Will not pay out if the insured dies from an infection from an accident|
Who Needs Accidental Death and Dismemberment Insurance?
ADD coverage is not for everyone. This kind of policy only covers a very specific kind of death and is therefore not nearly as beneficial as traditional life insurance.
Those who might consider this type of coverage are people who have an uninsurable condition, or if they want to increase their existing coverage.
Traditional life insurance covers both unforeseen and foreseen causes of death, which makes it much more sensible. However, this kind of coverage might also be ideal for people who have risky lifestyles and who have an increased chance of being in an accident.
No two types of insurance are the same. Each one is designed with different pros and cons, and each are more or less advantageous to every individual.
Understanding how life insurance works is a key component to being protected in all of the right ways. Canadian insurance statistics have shown that Canadians have more than $400,000 of protection per household, proving that insurance still holds strong value.
For individuals, families, and businesses who are considering life insurance, it is best to speak with a financial advisor. This will help to recognize what the person or group needs in terms of coverage, and where they might find the best options.