Know you need life insurance, but not sure which type of coverage makes the most sense for you? This article will give you a quick rundown of the options so you can start to narrow down your choices. (If you’re not yet familiar with the basics, check out our Life Insurance Demystified article first.)
There are different types of life insurance, but all coverage essentially falls under two main categories: term life insurance and permanent life insurance. There are specialty products, too, such as personal accident insurance.
Let’s first look at the most popular type—term life.
Simple, easy to buy and more affordable than permanent coverage, term life insurance is the crowd favourite in Canada.
Term life insurance is designed to cover short-term needs, which means many people like to buy it for themselves when their kids are young, they share financial responsibilities with a spouse or partner, and/or they’re carrying debt, such as a mortgage. Think of it as a temporary safety net you place under your family—it protects them against a financial catastrophe when they need it most.
When you buy term coverage, you get to choose your “term”. Most insurers offer plans with terms of 10 or 20 years. At RBC Insurance, you can choose a term from 10-40 years—and anything in between.
Although term life insurance is temporary, you can renew it after your initial term is up1 and your premium is locked in for the entire term; this means your cost can’t go up for the entire term you’ve chosen (let’s say it’s 20 years).
If you want to renew your coverage after the 20-year term is up, Term life insurance has guaranteed renewal, regardless of your health status. However, your premiums will be higher because they will be based on your new age. Most term policies also give you the option to convert to permanent coverage (such as universal life insurance) at a later time.
Permanent life insurance is more expensive than term life, but it gives you coverage for life. Some permanent coverage even combines life insurance with the opportunity to build up savings within your policy—called cash value or accumulation value—that you can access later in life.
These features and more make permanent life insurance ideal for covering long-term needs such as providing income to your spouse, paying for funeral expenses or passing on assets. For example, you can use permanent life insurance to help your kids cover the future taxes on a cottage you’re planning to leave to them.
Here’s a quick overview of each type of permanent coverage:
With this type of coverage, a percentage of your premiums goes towards purchasing life insurance, while the rest is deposited into an investment account that builds cash value. Each time you pay your premium, your cash value has the opportunity to increase.
As long as you don’t take the money out, and remain within tax-exempt limits, it cannot be taxed, which can help your savings grow faster. If you do exceed tax-exempt limits, the overflow will go into a side account, which is taxable.
Later in life, you can access the cash value that’s accumulated in your policy to supplement your retirement income, help your kids pay for post-secondary education and more. See 4 Reasons to Get Life Insurance at Any Age for more on this.
Universal life insurance is known for its flexibility—and it’s often called “adjustable” life insurance for that reason. Here’s just one example: you get two options with the death benefit. You can choose a fixed amount or an increasing protection death benefit that includes the death benefit plus your policy’s cash value. You’ll also get to choose how much you want to pay into your policy and how you pay your premiums.
All of these choices make universal life more complex than other types of insurance, but also very customizable to your specific wants and needs.
Learn more about universal life insurance today and see what’s offered at RBC Insurance.
Similar to universal life insurance, but less complex (and less flexible), participating whole life insurance offers lifetime coverage, guaranteed cash value and the opportunity to earn dividends and share in the insurance company’s profits. It’s often used in estate planning to help protect a person’s financial assets from risks such as market downturns, unnecessary legal fees and taxes.
With whole life insurance, a portion of your premium pays for the cost of insurance and the rest goes into a savings/investment account (managed by the insurer) where you can grow your guaranteed cash value. As with universal life insurance, you can access this cash value for anything you want—to go on a dream vacation, start a business, buy a home and more. Just keep in mind that any money you borrow will need to be paid back or it will reduce the death benefit for your beneficiaries.
Term 100 is the most straightforward type of permanent life insurance. Coverage is for life—the insurance company cannot cancel or change your coverage—and your premiums will never go up.
It’s more expensive than shorter term policies (like term 10 or 20), but less expensive than universal or whole life insurance because it doesn’t include the option to build cash value.
Learn more about term 100 life insurance offered at RBC Insurance.
Think “guaranteed acceptance” with no medical exam or health questions to answer sounds too good to be true? This type of coverage actually does exist.
To apply for this type of coverage, you’ll need to be 40 or 50+, depending on the insurer (at RBC Insurance, you can apply if you’re 40-75 and a Canadian citizen).
Since available coverage amounts are usually small—$5,000 to $40,000, for example—this insurance is often used to supplement existing life insurance for added security or to leave a little money behind to cover funeral costs and final expenses.
And since you don’t have to take a medical exam or answer any health questions, it’s typically very quick and easy to buy.
While it doesn’t really fit into either the term or the permanent bucket, personal accident insurance has an important role to play.
If you don’t qualify for other types of life insurance because of health issues or a high-risk occupation, you may still be able to buy personal accident insurance.
This coverage provides a benefit to your beneficiaries for a fatal accident only. Because the risks it covers is more limited, premiums are typically much lower than other types of life insurance. It’s also easy to buy.
Here’s a quick side-by-side look at the types of life insurance:
|Term Life||Permanent Universal Life||Permanent Whole Life||Term 100||Guaranteed Acceptance||Personal Accident|
|Ideal if you…||Want simple coverage to protect your family’s financial future for the short-term||
||Want to leave a little extra money behind||Don’t qualify for other types of life insurance|
|Does it include a tax-free death benefit4?||Yes||Yes||Yes||Yes||Yes||Yes|
|Does it build cash value or savings?||No||Yes||Yes||No||No||No|
|Can my premiums go up?||Yes, after initial term is complete||Yes||No||No||No||Possibly|
|How long will I be covered?||Your choice of 10-40 years, but you can renew up until age 1005||For life||For life||For life||For life||Until age 80|
|Do I have to take a medical exam?||Depends on the coverage amount, your age and health||Typically required||Typically required||Typically required||No||No|
Which type of life insurance is right for you?
If you’re still not sure what makes sense for you, a licensed insurance advisor is a good resource to help you answer this question. It’s easy to connect with us—request a call from an advisor or search for one near you now. Our advisors can even come to you!