Exploring Your Life Insurance Options
If you want a basic understanding of your life insurance options, here’s the 101. All life insurance plans start with the same basic precept. The policyholder pays a premium in exchange for a tax-free lump sum benefit that’s payable to their selected beneficiaries upon their death. But there’s more! Because life insurance enjoys favourable tax treatment under the Income Tax Act¹, it’s a valuable financial instrument that can do more than just pay a lump sum death benefit. Most Insurers design plans that offer features and benefits—added value for consumers that comes at a premium.
As always, we’re here to help you sort out your insurance needs and get the insurance that best suits your circumstances. But if you want the 101 on the options, we’ve separated the plans into four main categories below. Check them out!
Temporary
Term
Outlay
$ (short term) | $$$$$ (long term)
Plan
Initial terms of 10, 15, 20, 25, 30 or 35 years, and custom terms. There are two common types:
Term plans that automatically renew for the same term period at each renewal, and
Term plans that automatically renew for 1-year term periods after the initial term.
Premium
Premiums are level during the initial selected term.
Premiums increase at each renewal.
The longer the term, the higher the premium for the term (this applies to initial and renewal terms).
Main Draw
Low initial costs on shorter terms
Drawbacks
Typically, life insurance needs evolve and outlast the initial term.
For plans that renew for the same term at every renewal, premiums increase dramatically at each renewal.
For plans that renew annually after the initial term, even the 1-year term costs, though increasing gradually, eventually become very expensive.
Most Term insurance plans expire before life expectancy, at age 75 or 85. (Healthy individuals can often obtain a brand new less costly plan when Term premiums become prohibitive.)
Where it fits
For short-term, temporary needs. Term can also be added as an optional rider to many permanent plans, then dropped when it’s no longer needed.
Permanent
T-100
Outlay
$$ (T100) | $$$ (T100+)
Plan
Level guaranteed death benefit (T100+ plans can include cash values).
Premium
Guaranteed level for life, paid up at age 100.
Main Draw
Most T100+ plans include the following in years 11+:
a guaranteed annually increasing cash surrender value,
a policy loan feature,
the option to use the cash surrender value as collateral for a third-party loan, and
a reduced, fully paid-up amount of insurance coverage for life, should you stop paying premiums early.
Drawbacks
Lacks premium flexibility, so if you miss a premium, the policy will lapse (though some T-100+ plans offer options to cover missed premiums with the cash surrender value).
Most budget-friendly of the permanent plans but lacks investment and growth potential that makes other permanent plans more cost effective in the long-run.
Where it fits
For permanent needs, on a tight budget.
Universal Life
Outlay
$$$
Plan
Level guaranteed death benefit and guaranteed insurance cost.
Premium
The policyholder pays the minimum required premium (or more, subject to the maximum amount allowed under the Income Tax Act). Cost of insurance (COI) charges are deducted each month. COI options are Level or Yearly Increasing (YRT). Both are fully paid up at age 100.
Main Draw
Contractual Guarantees and choices including type of insurance charges.
These plans include a tax-deferred Accumulation Fund¹ with various investment account options allowing for pre-funding COI, policy loans, withdrawals, third-party borrowing (using the cash value as collateral), tax-free Disability Benefit, and tax-free payout to beneficiaries in the event of death.
Overall flexibility in future choices and planning options.
Drawbacks
Investment Choices need to be managed and monitored by policy owner.
Where it fits
For permanent, evolving needs and additional tax efficient pre-funding.
Whole Life
Outlay
$$$$$
Plan
Level guaranteed premiums and death benefit.
Premium
Premium options include level for life and may also include quick pay options (Level for 10, 15 or 20 years) when the policy becomes paid up.
Dividends (or bonuses) and policy cash values can also be used to offset premiums.
Main Draw
Includes annually increasing guaranteed cash surrender values.
Annual dividends (or bonuses) provide value for consumers that are tax efficient, for accumulating and growing the value of the policy including the Death Benefit and the Total Cash Surrender value.
Cash surrender values allow for policy loans, automatic premium loans if a premium is missed, third party borrowing (using the policy as collateral) and cash surrenders when a portion or all of the insurance is cancelled.
Drawbacks
The highest initial premium of all plans
No investment option flexibility like with Universal Life
Less overall flexibility
Where it fits
For permanent, evolving and increasing insurance needs.
References
¹ Along with the tax-free death benefit, the tax treatment of Canadian exempt life insurance policies includes tax-deferred accumulation. When there is a disposition of the life insurance policy (for instance on withdrawal, surrender, or policy loan) or when a dividend is paid to the policyholder, taxation may apply. Ask us about the taxation of life insurance policies.