In this article we’re going to show you how you can easily understand the differences between the different types of life insurance.
First, all life insurance policies are the same from from the perspective of the death benefit. If you have a $500,000 life insurance policy and pass, the death benefit cheque is $500,000 – it doesn’t matter what type of life insurance policy you had. So if it’s not the death benefit, what generates all the different types of life insurance?
The answer is mostly, in the premiums. And specifically, how you pay premiums over time.
Term life insurance has premiums that increase over time, based on your age. Premiums start low (when you’re younger), then over time as you get older, premiums go up. During the initial period after purchasing a policy the premiums are fixed for a period of time, called the term. So if you purchase a term policy and premiums are guaranteed to be level for the first 10 years of the policy, you have a 10 year term life insurance policy. After the first 10 years the policy may either be over, or it may remain in force but at a much higher premium – and then premiums would continue to go up over time.
Term life insurance is appropriate for families for income protection as it is inexpensive during the early years of the policy and when it premiums rise after the initial term many people will cancel.
Permanent life insurance premiums have premiums that are level for life (with one notable exception, below). However there’s a few things that give us a few permutations of permanent life insurance policies.
Term to 100 is like term in that it’s only about the life insurance and the premiums. Term to 100 has level premiums for life and ......nothing else. This type of policy was very popular for about 20 years starting in the mid 90’s but is now mostly unavailable in Canada.
Whole life insurance has premiums that are level for life but it has an additional feature that if you cancel early you may receive a partial refund known as a cash value. In the past these cash values have been sold as an investment (which they are not) and thus whole life may have a poor reputation with some consumers.
Whole life may be appropriate for children’s policies, or those seeking smaller policies for final expense costs such as burial or tax planning.
Universal life insurance starts out as either a 1 year term (so premiums are only level for 1 year – then they go up ever single year you keep the policy. Also called YRT) or a term to 100 policy.
Then, on top of the base policy, an investment account is offered. Premiums you pay above and beyond the basic 1 year or Term to 100 insurance costs are placed in the investment account. You don’t have to use the investment account, you can simply pay the basic premiums.
Universal life insurance with term to 100 insurance costs, and where the investment account is NOT use, can be useful for people as an alternative to whole life or term to 100. The use of the investment account, or the purchase of a universal life policy with a 1 year term insurance base policy is almost always a very very bad idea for Canadian consumers. These policies are only suitable for complex financial estate and tax planning needs – which is certainly not a need of most Canadian families.