When it comes to life insurance, having a strong understanding of the topic is important. A lot of times, insurance companies will sell someone a policy they don’t need, simply because the commission is higher.
Avoid this kind of situation by having a grasp on all of the options available.
Life insurance is a great asset to have, so long as the insured has the “right kind”. The right kind of insurance is different for everyone, so understanding the various options and who they’re best for is critical.
It’s also important to keep in mind that many policyholders change their policy as time goes on.
Some people start with term life and convert to whole life. Others might add additional policies, or sell their policy in a Canadian life settlement.
To gain a better understanding, the following information looks at two of the most popular types of life insurance: Term life and universal life insurance.
What is Term Life Insurance?
Term life insurance is the most simplistic and most affordable policy option. This protection only pays out a death benefit and is only applicable if the insured dies within the policy term. Terms last 5-100 years.
Beneficiaries are only paid if the insured individual dies within the designated term; otherwise, no payment is made. This is often why people choose to go with a permanent policy since it promises a lump sum.
Who Benefits from Term Life Insurance?
The following are some of the factors that might sway Canadians to go with term life:
Term life insurance is generally the most affordable option when it comes to premiums. The fixed rate stays the same.
This makes term life beneficial to families and persons who cannot afford higher premiums that often come with permanent policies.
However, it’s important to note that the rate will differ from person to person, depending on a number of factors. These factors include age, gender, health, and lifestyle.
Term life is also beneficial for people who prefer some flexibility in the beginning stages of their coverage. The policy converts to a permanent policy if preferred.
This is a big advantage, especially if the policy is set to end. Instead of paying for much higher premiums, people can convert to permanent before the deadline.
Term life is also flexible, in that the insured can build up the money they save and invest it elsewhere. Many who are in lifelong policies have less money to play with outside of their policy.
What is Universal Life Insurance and How Does It Work?
Universal life insurance is quite different from that term life, in that it offers more options. The main difference is that universal life is a form of permanent life insurance.
This means that the insured is covered until they die, no matter when that happens to be.
Another main difference is that there are investment opportunities, which are tax-deferred. Individuals who are interested in gaining additional income are usually more interested in this kind of option.
Premiums are flexible with universal life, which means they do not always stay the same like term life premiums do.
The death benefit is also not concrete and may remain at a specific value or increase over time.
The following are some of the main advantages and disadvantages of this policy:
|Cash value has a variable interest rate, which means it can build higher returns||The variable interest rate can also decrease, leaving the insured with less money|
|Various options to increase the cash value gained||Policy requires positive cash values to maintain its active state|
|More flexible than other permanent policies||No level premium means uncertainty in costs|
|Can take loans from the policy||If the insured dies while the loan is taken out, this amount is taken from the death benefit|
|Offers an additional savings account|
|If the savings are not taken out while the insured is alive, the company keeps it|
Many people are attracted to this type of permanent life insurance because the premiums are initially lower. Unfortunately, unlike an option like whole life insurance, the cost of universal life grows over time.
Oftentimes, the growing cash value isn’t even enough to cover the rising costs that occur.
Term Life vs. Universal Life Insurance in Canada
According to the Canadian Life and Health Insurance Association (CLHIA), 22 million Canadians had life insurance in 2016. That number equated to $4.3 trillion dollars, with most people preferring individual policies.
When it came to the type of insurance policy purchased, only 14% of Canadians chose universal life policies. In comparison, 36% chose a term life policy.
It has been argued that more Canadians want to be smart with their money as opposed to risky. There is an increased level of risk with policies such as universal, which tends to attract fewer people.
In comparison, term life is a concrete policy that has a concrete deadline and level premiums. In these cases, Canadians know how much they’re paying and what they’re paying for.
Canadians who have more assets, such as estates to cover, often go for a permanent policy to help cover more costs. People with an interest in the potential for investments also tend to lean towards permanent policies.
No one policy is best for everyone. In fact, there are lots of instances where policyholders will benefit from different policies over time.
Those who are not sure what option is best for their situation would benefit from speaking to various companies. By doing so, they can gain a better understanding of the options they have and how much they will cost.
Term life is a more consistent, more stable option compared to universal life insurance in Canada. While the risks are higher with universal, many people find that their long-term payout is well worth that risk.
How a person approaches their money will be a telltale sign about which policy is better for them.