How to choose the right type of life insurance for you
By ATB Wealth 14 January 2021 4 min read
Thinking about life insurance can be a daunting task. While it might be tempting to pick the least expensive solution, it’s important to do your homework first. Different types of life insurance provide different levels of benefits, flexibility and even investment opportunities.
Feeling confused? Fear not! Let’s discuss the different types of life insurance to help you make the best decision for you and your loved ones. After all, life insurance should be about creating security and comfort, not stress.
Types of life insurance: Term, Whole life and Universal
Term life insurance
As the name implies, term life insurance is purchased for a set number of years and is most commonly used when there is a temporary need for insurance coverage.
During a given term, you will pay a monthly premium, that is usually guaranteed. Most term insurance products are renewable and convertible, meaning they will renew, usually at a drastically increased amount, at the end of the term, and can be converted into another option at any time.
Term insurance can provide you with a set death benefit for a set amount of time, which could be 10 years, 20 years, etc. Term insurance plans often expire before the insured’s life expectancy, which is important to keep in mind.
Permanent Life insurance – Whole life and Universal
Insurance that lasts from the day you purchase it until the day you pass away is called permanent insurance, and it comes in a few different forms, including whole life insurance and universal life insurance.
Whole life insurance
The main difference between whole life insurance and term life insurance is that whole life insurance covers you for your entire life. It provides a guaranteed amount of money that you can pass on to your beneficiaries, with fixed premiums. It also has a cash value as the policy grows over time and can be withdrawn if the policy is surrendered. Whole life insurance policies typically have guarantees built in, for added security.
Whole life insurance does not renew after a particular term, or amount of time, and the level of coverage, terms and conditions on a whole life insurance policy remain stable. This type of insurance pays whomever you choose a tax-free payment upon death.
There are two distinct offers for whole life insurance policies—non-participating whole life insurance and participating whole life insurance.
In a non-participating whole life insurance policy, there tends to be guarantees and locked in amounts, coverage, and surrender values. In a participating policy, there are several additional options, including investment opportunities. For the investment portion of a participating whole life insurance policy, payments are pooled in a separate account called the participating account with other policy owners. The funds are professionally managed and may provide you with a dividend.
Being able to access the cash value of your policy can be helpful if needs arise during your lifetime. You can use these dividends as cash, to build more interest on the cash value of your policy, or to buy more paid-up insurance and increase your death benefit over time, while still keeping your premiums the same.
Whole life policies can be considerably more expensive than a term policy but can bring two great benefits:
- Participating whole life policies can provide a good rate of return over time. Also, the death benefit your beneficiaries receive is tax free.
- You can build up a cash value that can be used during your life. You can borrow against the value of the policy to fund things like education or your retirement. When you die, the tax-free death benefit can be used to repay any remaining debt owing.
In summary, whole life policies are suitable for individuals who:
- Want a set premium and benefit throughout their entire lifetime.
- May want access to the cash value of the insurance policy during their lifetime.
Universal life insurance
Universal life insurance policies are another form of permanent life insurance. Similar to a whole life policy, universal life insurance can be paid off before the end of your life, it builds a cash value and can be part of your overall investment strategy.
With universal life insurance, you select your investments and wealth can accumulate tax-free, within limits set by the government. You can also withdraw and borrow from your policy, with certain tax implications, and you choose who will receive your money when you die.
A key difference between universal and whole life insurance is that the premiums and payouts are not fixed at the time of purchase; they can be adjusted based on your needs, such as a change in career, health status or the changing needs of your loved ones.
A universal life insurance policy might be the right choice for you if you’re looking for:
- Flexibility to change your premium payment or death benefit throughout the course of your life.
- Being hands-on with your investment strategy.
Choosing the right life insurance for you
To summarize, your specific life situation will help determine the best life insurance policy for you.
For example, term insurance might be a good option if you have 10 years left on your mortgage and you want the peace of mind to ensure your loved ones can cover payments in case you die within that period of time.
Whole life insurance can be beneficial if you want to have a set premium payment that does not change, with a policy that covers you for your entire life. It has an investment function that allows you to access the cash value of the policy.
Universal life insurance provides flexibility, allowing you to scale up or down your premium or death benefit as your need or health status changes. It also has an investment element to help accumulate wealth.
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