Insurance as a concept dates back to Roman times, but it wasn’t a formal industry until the middle of the 18th century. Insurance is a means of sharing financial risk among many people, who all pay premiums in exchange for minimized cost in the event of an accident. This Guide to insurance: Life insurance can help Canadians protect their dependents from financial hardship, and the policy is a legal contract guaranteeing payment of a certain value in the event of the policyholder’s death.
Reasons to Buy Life Insurance
If one is in a marriage, their contributions to the household budget are very important. If a person dies prematurely, how can their dependents survive without their income? Below are some things to consider when deciding to buy a Life Insurance policy.
- Single parents are often a child’s sole source of support, and a sudden death can leave the kids without the monetary help they need.
- If there’s a mortgage on a home, a life insurance policy can pay it off when the policyholder dies.
- If there are children, a policy can pay for their college education after a policyholder’s death.
- Life insurance policies can help customers leave money to relatives and charitable organizations.
- Policies can play a key role in a farm or business succession plan.
- Life insurance can help to pay capital gains taxes when property is handed down as part of an estate.
Things to Consider
When a person has life insurance, they should regularly review their coverage requirements. As a family’s or business’ situation changes, so may its insurance needs. Inflation can cause a policy to decline in value over time, bringing about the need for the purchase of additional coverage.
Policy Types
Though there are numerous names for and types of policies, there are only two types of life insurance: term and permanent policies. Generally, permanent needs should be permanently insured, while temporary needs can be met with a term policy. In some cases, combining policy types can provide optimal coverage.
- Temporary needs include mortgages, business obligations and higher continuing income needs for small children.
- Permanent needs are funeral expenses, survivors’ income supplementation, capital gains tax payments, and disabled children’s dependency.
Before a withdrawal of some or all of a policy’s available cash value, customers should ask about potential tax implications. In some instances, some of the cash value of a withdrawal is taxable under Canadian law.
Variations on Policy Types
There are several variations on permanent life coverage: universal life, whole and variable life. All of these policies are intended to provide protection for the policyholder’s entire lifetime, as long as premiums are paid. Basic features include:
- Level premiums. Most policies have a constant premium over the policy duration, even though a person’s death risk increases as they age.
- Cash values. Monetary reserves accumulate over the years, and they are available if the customer wants to cancel or borrow against the policy. Cash value isn’t typically added to the policy’s payable-on-death amount.
- Non-forfeiture. These options can be available if the customer stops paying the premium; they can retain the policy or accept cash as a settlement.
- Policy dividends and participating policies. These share in the company’s financial experience, and dividends are paid on an annual basis. Premiums are assessed based on a conservative estimate of future expenses and earnings. While experience is often more favourable, surpluses are created and companies can credit policyholders. Because dividends are given based on future earnings and costs, they aren’t guaranteed.
Canada’s rules on life insurance are complex, and they are constantly changing. By learning more about their options, customers can make the right purchase decision.
