Life insurance is a security blanket for your loved ones. It is there to protect anyone who depends on you financially in the worst-case scenario.
Life insurance comes in two flavours: term and permanent. Both are designed to help provide your loved ones with financial security in case you die.
Term life insurance is the simplest and most affordable form of life insurance. It pays out a benefit to your beneficiaries only if you die within a specified timeframe, usually 10, 20, or 30 years. This is the best option for 95% of young families.
The alternative (permanent policies) are much more expensive – we are talking hundreds of dollars a month more expensive. Why? Because it guarantees that your beneficiaries will receive a death benefit. You can die young or die old, and your insurance company will still pay out.
Let’s break these options down for you.
Term life insurance is often called “pure life insurance” because it’s designed only to protect your family if you die prematurely. If you die of old age or well into retirement, it is likely that your policy term has elapsed by that point and your dependents will not receive a payout.
For 95% of young families, term is the way to go. Having life insurance protection for longer than you actually need it for may not seem like such a bad thing. But why pay for something you don’t need? Term life insurance lets you pay for coverage only during the years when you’ll need it (most likely in your 30s, 40s and 50s).
But you might be asking yourself.. what happens when it expires?
After the term expires, you have a few options:
The most likely scenario is that you won’t need life insurance anymore (you are near retirement, your mortgage is almost paid off & your kids are out of the house!) If this is you, you can let your policy expire and never look back.
If you still need insurance, you have two options. If you are still pretty healthy, you just apply for a brand new policy (at higher rates). If you’ve been diagnosed with a pretty severe illness, the good news is that you are still covered. That is because term insurance comes with a pretty standard feature called “guaranteed renewability.” In other words, if you still need the insurance after the term expires (for example, 10 or 20 years down the road), you can renew the policy without having to show proof of new health conditions or go through additional medical underwriting. This provides you with some protection against getting sick because your renewal rates are guaranteed.
You can get life insurance online, all of the best life insurance companies sell term life, so it’s easy to find rates.
Permanent life insurance pays out a benefit to your beneficiaries no matter when you die. Permanent insurance is much more expensive. Why? Because it guarantees that your beneficiaries will receive your death benefit. You can die young or die old, and your insurance company will still pay out your benefit.
A permanent policy also includes an investment component known as the policy’s cash value. The cash value grows tax-deferred, meaning you won’t pay taxes on the investment gains while they’re accumulating.
Here is how we break them down
|What is it?||“pure” life insurance||Life insurance + savings|
|How much does it cost?||Average $30 / month||Around 4x Term life|
|Best fit for||Replacing lost income, paying off debts||Wealthy people with huge estates|
Is the cash value component of permanent life insurance an advantage?
The cash value is an investment component of a permanent life insurance policy. It allows you to set aside money and invest it tax-free. The investment accrues separately from the money needed to cover the cost of your life insurance. Making money off your insurance premiums? This sounds like a pretty sweet deal.
However, this “investment feature” is rarely as affordable, effective, or efficient as other tools available to do the same thing (like your RRSP or TFSA). If you’re looking for a get-rich-quick scheme, this isn’t the place to find it.
The bottom line?
Pay for insurance when you need it (most likely in your 30s, 40s, and 50s) and drop it when you don’t.
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