Life Insurance Basics
What is life insurance?
Life insurance is a contract between you and an insurance company where you pay regular amounts of money called premiums. In exchange, if you pass away, the company pays a sum of money to the people you choose, known as your beneficiaries. This money can help cover living costs, debts, or funeral expenses, ensuring your loved ones are financially protected when you're no longer there to provide for them. It's a way of looking after your family's future financial needs.
Is life insurance necessary for me?
An essential question to ask yourself when considering life insurance is: would my absence cause financial hardship to those important to me? If the answer is YES, then life insurance can be a crucial solution to secure the financial well-being of your loved ones.
Our clients most often state the following reasons for getting life insurance:
Income replacement
If your partner, children, aging parents, or other dependents are relying on your income, your absence will have a substantial impact on their quality of life.
Children
As mentioned above, if your family is dependent on your income, the way of life of your kids will be affected if you are no longer there. Moreover, even if you are not the breadwinner, the care that you provide would need to be paid for. Life insurance can also ensure your kids get a college education.
Covering a mortgage
For most Canadian families, a mortgage is their biggest financial commitment. Life insurance can provide peace of mind by guaranteeing that your family can continue to live in their home, even if you're no longer there. Unlike insurance from your lender, the coverage does not decrease over time; it stays in place if you switch mortgage providers or if your mortgage is paid off.
Funeral Expenses
The costs associated with a funeral and other final expenses can be substantial, potentially placing a heavy financial load on your family. Life insurance provides a safety net, so your family isn’t left with this financial burden.
Quick Terminology Lesson
Beneficiary:
The person or people who receive the money from the insurance company when you pass away.
Premium:
The amount you pay regularly to the insurance company to keep your coverage active.
Death Benefit:
The money the insurance company pays out to your beneficiary upon your death.
Policyholder:
The person who owns the insurance policy and pays the premiums.
Rider:
An additional feature you can add to your policy for extra coverage or benefits.
Underwriting:
The process by which the insurance company assesses the risk of insuring you.
Cash Value:
A component of some life insurance policies that functions like a savings account and can grow over time.
Face Value:
The amount the insurance policy promises to pay out upon death.
Grace Period:
The extra time you have to pay your insurance premium before your policy is canceled.
Lapse:
What occurs when you fail to pay your premium on time, resulting in the termination of your insurance.
Exclusion:
Specific situations or conditions that your insurance policy does not cover.
Types of Life Insurance
Broadly speaking there are two types of life insurance: Term and Permanent.
Term as the name implies provides coverage for a set number of years. It is up to the policyholder to choose how long the protection lasts, typically it is 10, 20 or 30 years. To learn more about Term Life please CLICK HERE.
Permanent life insurance on the other hand, provides coverage for a lifetime as long as the premiums are paid. There are 3 types of permanent life insurance: Term 100, Whole and Universal.
Term 100
Term 100 life insurance provides lifetime coverage while not breaking the bank. Since it does not include a cash value or investment component, it is the most affordable type of permanent life insurance.
Whole Life
Whole life insurance offers coverage for the rest of your life and includes a cash value component that lets you tap into it while you’re alive.
Universal Life
Universal life insurance combines permanent insurance protection with investment options. A portion of the premium purchases your insurance, while the rest earns interest that is not taxable while it remains in your policy.
How to choose the right policy
While choosing the right life insurance plan for, you should consider your financial goals, budget, and how long you need the coverage. Our financial advisor can help you navigate these factors if you are feeling overwhelmed.
Here are some factors to take into consideration:
Think about the purpose:
Reflect on why you need life insurance. Is it to cover specific debts like a mortgage, provide for your family's living expenses, or cover funeral expenses?
Evaluate the Length of Coverage Needed:
If you need coverage for a specific period, such as until your mortgage is paid off or your children are grown, term life insurance might be suitable. If you have longer financial commitments, consider permanent life insurance.
Affordability and Understanding the Costs:
Term life insurance is generally less expensive than permanent life insurance, but it provides coverage for a set period of time. Decide how much you can afford to spend on premiums. Understand the costs not just today, but how they might change in the future.
Think About Investment Potential:
If you're interested in a policy that can also serve as an investment or savings component, a whole life or universal life policy might be right for you. These types allow you to build cash value.
Assess Your Health:
Some consider your health status when determining premiums. If you have serious health issues, a policy with a guaranteed acceptance might be necessary, though it may offer lower coverage amounts.
Review Flexibility:
If you want the ability to adjust your premiums or death benefit over time, universal life insurance offers more flexibility than whole or term life policies.
Read the Fine Print:
Look at the policy details, including exclusions, limitations, and the conditions under which the policy pays out. Insurance companies typically allow 10 days to review your policy to ensure you are happy with your coverage.
How much coverage do I need?
Figuring out how much coverage you actually need can be a daunting task. There are many factors to consider like your current debts, savings and what do you want the coverage for. To start you can CLICK HERE for our LIFE INSURANCE CALCULATOR that’s fast and easy to use.
You can also try this simple estimation method:
Set your goals
Start by figuring out why you need life insurance. Is it to replace your income, cover the mortgage balance, pay for funeral expenses?
Make sense of the numbers
Now that you have outlined the goals of your life insurance policy, estimate the cost. For example:
~ 15 years
Do the math
Replacing income goal - $75,000 * 15 (years) = $1,125,000
Sending kids to college goal - $120,000
Total: $1,245,000
Now subtract any savings or RESPs to estimate the final coverage amount. Please note that this is just an estimation, the actual amount will depend on your personal circumstances and budget.
What Factors Affect Life Insurance Cost?
Here are the main factors taken into consideration when determining your life insurance premium:
Type of Insurance Policy:
The choice between term life insurance and permanent life insurance affects the cost. Term life is generally less expensive than permanent life insurance. The type of life insurance policy should fit your needs and budget. To learn more about different types of life insurance, CLICK HERE. Our licensed financial advisors can also help you navigate toward the right insurance solution.
Coverage Amount:
Higher coverage amounts will lead to higher premiums. The more financial protection the policy provides, the more it will cost. Our financial advisor can help figure out the needed coverage. You can also use our calculator for some preliminary calculations.
Age:
Generally, the younger you are when you purchase life insurance, the lower the premiums. This is because younger individuals are considered lower risk in terms of health issues. Therefore, getting coverage sooner rather than later is important, since premiums inevitably increase over time.
Gender:
Typically, females may have lower life insurance costs compared to males, partly due to differences in life expectancy.
Smoking Status:
Smokers typically pay higher rates due to the health risks associated with smoking. It’s important to note that if you have been smoke free for 12 months or more, you can reapply for non-smoker rates.
Health Status:
Your current health, including any pre-existing conditions, plays a significant role. Healthier individuals usually get lower rates.
Occupation and Hobbies:
Jobs or hobbies that are deemed high-risk can increase insurance costs. For example, if you're a pilot or enjoy skydiving, you might pay more.
Application process overview
Our streamlined application process is designed to match you with the ideal product for your needs swiftly and without any hassle:
The first step is to apply for a quote on our website or by calling 1.877.754.5404.
You will then be put in touch with our friendly licensed advisor who will evaluate your requirements and may ask some health-related questions to pinpoint the life insurance plan that aligns with your situation.
If you are happy with the presented option, the advisor completes the application process over the phone. Your policy is typically issued within 24 hours, you're covered and stress-free.
Why Life Insurance is Essential for Business Owners
In essence, life insurance for business owners isn't just about their personal peace of mind; it's a strategic tool for risk management and ensuring the continuity of the business.
Life insurance is important for business owners for several key reasons:
Debt Protection:
If a business owner passes away, any outstanding business debts or loans might become the responsibility of their family or business partners. Life insurance can provide the funds needed to settle these debts, preventing the business or family members from financial strain.
Buy-Sell Agreements:
For businesses with multiple owners, life insurance is often a part of buy-sell agreements. Upon the death of an owner, the death benefit can be used to buy out the deceased owner’s share of the business, allowing for a smoother transition and ensuring the business continues operating with minimal disruption.
Key Person Insurance:
If a business owner is integral to the operation and success of the business, their death could jeopardize the company’s future. Life insurance can act as "key person insurance," providing financial support to the business during the transition period following the loss of the owner or another key employee.
Estate Taxes and Liquidity:
In some jurisdictions, the death of an owner can trigger estate taxes that may be substantial. Life insurance can provide the liquidity needed to pay these taxes without the need to sell off business assets.
Income Replacement:
For family-owned businesses, the owner’s income is often vital for the livelihood of the family members. Life insurance ensures that the family continues to have a source of income to maintain their standard of living.
Succession Planning:
Life insurance can be a cornerstone of succession planning, ensuring that there is funding in place to support the business and its staff until a new owner or leader can take over.
Employee Benefits:
Offering life insurance for employees can be an attractive benefit that helps with the recruitment and retention of top talent.
Frequently Asked Questions
Please note if you are a client and have questions about your policy,
please visit Client Support.
Can I have multiple life insurance policies?
Yes, you can obtain multiple life insurance policies, as long as the total benefit does not exceed the maxim coverage amount. For example, our Paramount Term Life Insurance is offered up to $500,000. Therefore, two policies can be purchased that in total add up to $500,000.
Are life insurance premiums tax-deductible in Canada?
In most cases your insurance premiums are not tax deductible, but speak to your accountant about any exceptions.
What happens if I miss a payment?
There is a 30-day grace period during which a payment can be made. After 30 days the policy is considered terminated.
Can I change my life insurance policy later?
You are able to decrease the amount of coverage to better align with your needs. It is not possible to increase the amount of coverage as this would require additional underwriting.
For our term life insurance, you are able to convert your policy to a permanent life insurance plan at any time before the age of 70.
How does smoking affect life insurance?
Smoking has a significant effect on life insurance premiums, as smokers fall into a higher risk category. Please note that you can reduce your premiums by reapplying if you have been a non-smoker for at least 12 months.
Does life insurance cover death from any cause?
This would depend on a type of policy. Accidental Death Life Insurance, for example would only pay for death as a result of an accident. Typically; however, a life insurance policy would pay out for death from any cause with an exception of suicide, which is excluded from coverage in the first 2 years.
What are the common exclusions to life insurance policies?
As mentioned above, in the first two years of the policy death as a result of a suicide will not be covered.
Are there any payouts when the policy ends?
Currently, the plans we offer do not offer cash value. If you are looking for plans with cash accumulation/investment component Whole or Universal Life Insurance would be a better fit. Please note that because of these features, such plans are typically more costly.
Who will be excluded from applying?
Each policy has an age restriction and a residency requirement. Typically, Canadian residents ages 18 to 80 are able to apply.
Are there medical exams required to apply for life insurance?
Life insurance has come a long way, and currently, all of our policies do not require a medical exam. The modernized application process ensures thorough information capture, eliminating the need for needles and nurse’s visits.
Will my premiums change over time?
All of our policies have fixed premiums that are guaranteed to stay level.
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