Understanding life insurance
Life insurance helps your loved ones deal with the financial impact of your death. It provides them with a one-time, tax-free payment, called a death benefit. They may use the amount to:
- replace your income to allow your family to maintain their standard of living
- provide for your children or dependents
- pay for your funeral expenses
- pay off your debts
- make a donation to charity
You may also choose to leave the money to your estate or to a trust.
Permanent life insurance
Permanent life insurance gives you lifetime coverage. Your beneficiaries will get a death benefit if you die while your insurance policy is in effect.
Permanent life insurance policies usually build up a cash value. This means you get a cash value back if you cancel your policy. The amount would be less than what you paid in premiums for the insurance costs.
You may be able to take out a policy loan or use your life insurance policy as collateral for a loan. If you borrow using the cash value of your policy, you must repay the loan. If you don’t, it may reduce the amount of money your beneficiary will receive. It may also reduce the amount you get back if you cancel your policy.
Whole life insurance
Whole life insurance is a type of permanent life insurance that provides you coverage for your entire life. Your premiums won't change as you get older. Your policy will often have a guaranteed minimum cash value. This type of insurance also allows you to access additional funds during your lifetime.
Universal life insurance
Universal life insurance is a type of permanent life insurance that combines life insurance with an investment account. The account offers you a way to build wealth for your beneficiaries. It has a cash value and allows withdrawals, as well as loans.
The death benefit and cash value of your investment account may increase or decrease depending on the:
- types of investments you choose to hold in your account
- returns on those investments
You may also choose how to invest your premiums. You may increase or decrease your premiums within the limits specified in your insurance policy. However, your premiums could increase if returns on your chosen investments fall.
Term life insurance
Term life insurance pays a death benefit if you die within a specific period.
The length of your coverage is either for:
- a fixed period, such as a term of 10 or 20 years, or
- until you reach a set age, such as 65 years old
If you die within the duration of your policy, your insurer will pay the death benefit to your beneficiaries. Once the term ends, the coverage ends, and your beneficiaries don’t receive any payment.
Term insurance policies don’t include cash value. This means you can’t borrow against your policy. You also won’t get any cash value back if you cancel your policy. You might be able to renew certain term policies.
Generally, your insurance company will establish your premiums according to the length of the term. Your premiums may increase when you renew the policy. For example, premiums would increase every 5 years on a 5-year renewable policy.
Term life insurance premiums are generally less expensive than permanent life insurance premiums when you first buy the policy. If you don’t pay your premiums, your insurance company may cancel your policy.
Term life insurance options for couples
When considering buying life insurance as a couple, make sure you consider all the options available to you. Look at what coverage you may already have through your employer. You may also have already bought life insurance when you were on your own.
Joint first-to-die term insurance
Joint first-to-die term insurance pays a death benefit when the first partner dies. Both are insured under the same policy and receive the same coverage. If your partner dies, you’ll need to apply for a new policy to continue coverage. This type of insurance is usually less expensive than 2 identical single policies. It’s also less flexible if you separate or divorce.
Single term insurance
Single term insurance provides each partner with their own policy and their own coverage amount. It’s usually more expensive than a joint first-to-die policy. Since you each get your own policy, it’s relatively easy to change the beneficiary if you separate or divorce.
Naming a beneficiary
A beneficiary is the person you name to receive your death benefit. You may name your spouse, another family member, a friend, or a charitable organization as beneficiary.
You may name more than one beneficiary for your life insurance policy. If you do, your insurance company will divide the death benefit among them. You may assign different proportions of your life insurance benefits to each beneficiary.
If the beneficiary is revocable, you may change the beneficiary at any time without telling them.
If the beneficiary is irrevocable, you must have the irrevocable beneficiary's written permission before making beneficiary changes.
If you live in Quebec and name your spouse as your beneficiary, they’re presumed irrevocable unless specified otherwise. You must check off the revocable box if you want to change it.
Naming a beneficiary who is under the age of majority
If your beneficiary is under the age of majority, you may want to set up a trust and designate a trustee or administrator. This person holds the amount of the death benefit in a trust on behalf of the minor.
Without a trustee or administrator, the province or territory will hold the death benefit in a trust. They’ll pay your beneficiary when they reach the age of majority. Consult a lawyer or financial advisor for more details.
Naming your estate as the beneficiary
If you name your estate as the beneficiary, the death benefit will become part of your estate. The estate will distribute the death benefit according to the terms of your will. The amount of the death benefit will also be subject to estate taxes. If the death benefit is part of your estate, creditors may claim it to pay for your outstanding debts.
How to name a beneficiary
It's important to name a beneficiary for each policy form when you purchase life insurance. If you don’t, your insurer will assume by default your estate as the beneficiary.
You may want to consider naming an alternate or contingent beneficiary. This person or persons will receive the death benefit if your named beneficiary dies either before you or at the same time as you.
It's a good idea to review your beneficiary designations from time to time and update them if necessary.
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