We all know that getting life insurance is important. But what are the various benefits a policy has to offer?
While protecting your loved ones financially in a worst-case scenario is the most obvious and arguably the most important benefit, there are a lot more perks that come with having coverage in place. Let’s take a deeper look.
1. Life insurance offers many different benefits – to name a few, you'll be able to protect your loved ones, cover your final expenses, ensure a tax-free benefit, and provide peace of mind with the right policy in place.
2. There are also different benefits when it comes to term life insurance and whole life insurance. For instance, term life policies are a cheaper option that have the flexibility for renewal or conversion. Whole life policies, on the other hand, accumulate cash value which you can access during your lifetime.
3. Life insurance policies can also come with living benefits. These are riders that you add on to your plan to protect yourself financially during an unforeseen case, such as a terminal illness or critical illness diagnosis.
What is life insurance?
Before we get into the benefits of life insurance, let’s review what life insurance really is (and how it works in Canada).
Life insurance is essentially an agreement between you and your insurer – by paying premiums on a regular basis (usually monthly or yearly), your insurance company agrees to pay out a death benefit after you die. This lump-sum payment goes towards your named beneficiaries which can be anyone you want (e.g. child, spouse).
Broadly speaking, there are two main types of life insurance: term life insurance and whole life insurance. A term life policy only insures you for a set period of time. A whole life policy, on the other hand, insures you for an entire lifetime – provided you continue to make your premium payments. Each of these comes with its own different set of benefits which we will cover later on.
The top benefits of life insurance
While there are countless benefits to purchasing a life insurance policy, here are four main reasons to do so.
1. Protect your loved ones financially
While it’s obvious that life insurance is there to protect your loved ones financially, all the different ways a death benefit can be used might not be as obvious. Your beneficiaries can apply the lump sum to anything they want, including:
- Replacing your income for regular living expenses
- Paying down the mortgage for the family home
- Paying off any leftover debt (e.g. credit card debt, car loan)
- Building a college fund for your child’s future education
2. Cover the final expenses
The death benefit can also be used to cover any final expenses, such as for the funeral, burial, or cremation. Funerals in Canada can cost upwards of $10,000 – having a life insurance policy can help alleviate another factor of financial stress during a time of grief.
3. Ensure a tax-free death benefit
In most cases, a life insurance death benefit is also paid out tax-free. The money won’t be considered income on your loved ones’ tax returns, leaving them with more funds to allocate toward important expenses.
There are, however, a few exceptions to the tax-free rule of life insurance. For example, if you withdraw cash value from your policy, you could be taxed on the investment gains.
4. Receive peace of mind
Lastly, the benefits of life insurance aren’t limited to financial factors – they can be emotional too. Knowing you have the right coverage in place in the event of your passing can be enough to make the premium payments worth it.
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Benefits of term life insurance
As the most popular type of life insurance, a term life insurance policy offers your loved ones financial security temporarily, for a set period of time (e.g. 10 years). Here are a few of its benefits.
1. Easy to understand – Unlike many whole life policies, term life insurance is fairly easy to understand. You get to choose your own death benefit and your own term. Let’s say you want to be insured for $500,000 for the next 10 years – in this case, your beneficiaries will receive the money in full if you pass away within the decade.
2. Generally affordable – Term life plans are generally much more affordable than whole life plans. Because insurers aren’t guaranteed to payout anything, it’s a good option if you’re looking for cheap coverage to suit temporary needs (e.g. you have an outstanding mortgage). If you purchase a policy while you’re young and healthy, premiums can even start at about $20 each month.
3. Level premiums – Term life insurance premiums are also levelled. This means that if you lock in a cheap rate at 25 years old, you won’t need to worry about this rate increasing throughout your policy term. Keep in mind, however, that you’ll likely be quoted for higher rates after your policy expires due to your increased age.
4. Renewable and convertible – Term life insurance is also a good starting point for first-time buyers due to its flexibility. Oftentimes, policies are renewable or convertible life insurance plans – meaning, you can either extend your coverage for another term or convert it into a permanent plan when your policy nears its expiration.
Benefits of whole life insurance
On the other hand, whole life insurance may be exactly what you need if you’re looking for protection that lasts an entire lifetime. Here are some main benefits of this permanent life insurance product.
1. Guaranteed death benefit – Since you’ll be insured for your entire lifetime, your insurance company is guaranteed to payout a death benefit eventually when you pass away. But of course, this is contingent on you meeting all your regular premium payments.
2. Cash value accumulation – One of the biggest benefits of owning this type of plan is the cash value accumulation of whole life insurance. When you pay out regular premiums, part of this money will go towards building your cash value reserve. You’ll be able to access this money during your lifetime in different ways, such as using it to cover premiums, taking it out as a loan, or simply withdrawing the funds. If you choose to cancel your coverage (also known as surrendering the policy), you may also receive some money back through its cash value.
3. Potential dividends – Participating life insurance is a specific type of whole life plan that allows you to receive dividends from the investments your policy is invested in. While they aren’t guaranteed, dividends can be used in various ways, such as to pay your premium, increase your cash value, or add to your death benefit.
4. Level premiums – Similar to term life insurance, most whole life plans have level premiums, so you won’t need to worry about increased rates after your policy is locked in. With universal life insurance policies (another type of permanent coverage), your premium may change throughout the course of your life.
Life insurance with living benefits
While most people purchase coverage to ensure their loved ones are financially protected after they die, life insurance can also come with living benefits – these provide financial support while the policyholder is still alive.
Living benefits come attached to your life insurance policy as a rider. While they may already be included in some cases, more often than not, it’ll come at an additional cost. Here are a few common types of living benefit riders:
- Chronic illness rider
- Critical illness rider
- Terminal illness rider
- Long-term care rider
You’ll be able to withdraw a portion of your policy proceeds during a specified financial emergency. The funds can be used for related expenses, such as income replacement or at-home care. The drawback? It may also reduce your death benefit.
The bottom line
Having a life insurance policy provides benefits that go beyond payment to your loved ones after you die. To find out how much (or how little) you'll be paying for your personalized coverage, compare life insurance quotes with us today.