Having money is one thing, but knowing what to do with it is totally different.
Understanding the options that come with having money, is very helpful for using it well.
Some people like to keep their money in a regular bank account, while others like to invest it.
There are four types of financial risk takers:
Individuals with the least risk are “risk avoiders”. They are very careful with their money, often favoring low-earning investments.
“Risk embracers” enjoy the thrill of a risky investment, and are attracted by the possibilities.
While there are all kinds of preferences, the most important thing is that everyone knows about their options.
By being informed, individuals can make smarter decisions about where their money should be going.
Two very common terms that people tend to misunderstand are “Life Insurance” and “Tax-Free Savings Account”.
The following are some of the advantages and disadvantages of each, to help people make better decisions about where their money goes.
- 1 Advantages of Life Insurance
- 2 Term Life Insurance Advantages
- 3 Term Life Insurance Disadvantages
- 4 Permanent Life Insurance Advantages
- 5 Whole Life Insurance Disadvantages
- 6 Tax-Free Savings Account (TFSA)
- 7 TFSA Advantages
- 8 TFSA Disadvantages
- 9 Life Insurance VS. TFSA
Advantages of Life Insurance
Life insurance does not protect the life of the individual. Life insurance offers protection from financial trouble.
An individual agrees to pay a premium, and in exchange, a lump sum is given to their beneficiaries. The lump sum is given at the time of the individual’s death.
When an individual dies, they may leave behind others who were dependent on them. Others may want to leave financial support to a friend or charity, or they may want to cover their funeral costs.
The following are the advantages of the two main types of life insurance, Term Life Insurance, and Permanent Life Insurance.
Term Life Insurance Advantages
Individuals choose coverage for as long as they want. E.g. 5 years, 10 years or 30.
Term life insurance is the simplest and most affordable option. Most individuals and family members choose this option, and they can enjoy premiums that don’t increase over time.
Low Premium & High Coverage:
The younger an individual is who obtains life insurance, the better. Young, healthy individuals can get a very low premium initially, with impressively high coverage.
Different types of term life insurance (level, increasing and decreasing) can be used as riders with permanent life insurances. Individuals can also upgrade their term life to permanent life insurance at any time.
Term Life Insurance Disadvantages
Increased Cost at Renewal
Term life ends at a specific point. A renewed policy has premiums that are more expensive than the first round and are often higher than those of whole life.
In comparison to permanent life insurance, term life coverage only offers a death benefit. There is no extra value or cash to use later on.
No Guaranteed Payout
Only if the insured person dies within the chosen term will beneficiaries be given the payout.
Permanent Life Insurance Advantages
Unlike term life, permanent life insurance lasts the whole life of an individual and the worth never lowers.
Permanent life insurance has other options that allow for investment opportunities. Cash value is a popular aspect that grows with time.
Other investment opportunities include mutual funds, bonds, etc. for increased payout.
Permanent life premiums remain consistent for the entire duration of the coverage. This means no renewing and no increased prices.
Whole Life Insurance Disadvantages
Initial Premium Cost
Permanent life insurance has hefty premiums. Unfortunately, many people cannot afford them. Benefits like the cash value aspect often help people to choose this option more comfortably.
The underwriter adds extra fees to whole life insurance. This is due to its high value and open-ended coverage.
Tax-Free Savings Account (TFSA)
What are TFSA’s? Simply put, TSFA’s are accounts that allow for financial contributions tax-free.
TFSA’s, including interest and dividends made, do not have taxes.
Anyone who is saving for big purchases will enjoy the TFSA. This is because large amounts can be saved and taken out without having to worry about extra charges.
TFSA money grows over time when it is invested. Things like interest and dividends are tax-free for life, and any growth can be taken out without additional charges.
Can’t Claim on Taxes
Unlike RRSP’s, the TFSA is not applicable for tax write-offs. With RRSP’s individuals are able to claim
Lack of Proper Use
Many people have their money in a TFSA. Unfortunately, not everyone utilizes the many options they have, or even know about them.
The TFSA offers investment opportunities. Those who simply let their money sit in the account may as well have a regular savings account without growth.
Life Insurance VS. TFSA
Not everyone needs a TFSA, but everyone can benefit from life insurance. In every situation, life insurance is always a smart purchase.
People who want to see their money grow can invest in permanent life insurance, which offers the cash value aspect. They may also use a TFSA.
While term life has no investing option, it is cheaper. This leaves more money for other investments or a TFSA.
There are benefits to both of these terms. Therefore, it is smart to think about each of them as a strong investment for the future.