Life insurance companies want to bring their own spin to the types of life insurance they sell to try to differentiate themselves in the market place and this tends to create a lot of confusion for Canadian consumers.
Ultimately, the person buying the policy wants their beneficiaries to have money if something happens to them but the big question is ‘how long do they need coverage?’
The first thing you want to discuss with you life insurance broker is what types of life insurance there are and how long you will want the coverage in place. Do you want permanent insurance to guarantee a benefit is paid eventually no matter how long you live or do you want coverage to get you through to a certain milestone life your children becoming adults or paying off you mortgage. Term life is the most common solution because it has the best life insurance rates and it’s easy to understand.
In all cases you want to speak with an independent broker, someone that works for you and not the insurance company and someone that can explain the different types of life insurance. Broker’s get the same pricing as ‘house agents’ but they’re able to get rates from all companies and blend solutions to create a tailor made solution. With a house agent, they can usually only sell their house brand which may not be very competitive.
Here are the main types of Life Insurance:
Term Life Insurance
- Good: You get the most coverage for the lowest rates and a term life policy is easy to understand.
- Bad: You may still need life insurance at the end of your term. The guaranteed renewal rates will be much higher than a new policy and if your health has changed you may not qualify for new coverage.
The decision making process is fairly easy once you know what types of life insurance there are – how much coverage do I need and for how long – if that rate works for your budget you can proceed with the application. The most common term lengths are 10, 20, & 30 years, with each term length being a guarantee from the insurance company that they will not change your rates for the duration of the term.
Mortgage Life Insurance
- Good: Your mortgage is paid off if something happens to you.
- Bad: Your beneficiaries don’t have any money because you’ve only protected the lenders interest. If your family needs money they need to sell their home or try to borrow money or take a new mortgage. Which might prove difficult without you.
Mortgage insurance is really just a marketing term and a way for lenders to have their clients pay to protect the lenders interest. Wise Canadian consumers buy term life insurance to protect their mortgage balances because the premiums are lower, the benefit amounts are higher and the money is paid to their beneficiaries – not the lender.
Universal Life Insurance
- Good: Permanent Coverage with most flexibility for paying premiums.
- Bad: Usually the premiums are paid for life so the longer you live, the more you pay.
Universal Life is the most affordable type of permanent life insurance. The policy owner can choose to pay the ‘pure cost’ of insurance or deposit additional funds into the policy to offset future premiums. The investment growth inside a universal life policy does not attract any tax for the policy holder while the money is inside the policy but there is usually no cash value associated with the insurance portion of the policy contract.
Whole Life Insurance
- Good: Permanent insurance with the most guarantees.
- Bad: The most expensive way to buy life insurance.
Whole life insurance is the Cadillac of policy types. Premiums are usually structured so the policy is completely ‘paid up’ after a certain number of years, 10, 15 or 20 years with growing cash values and death benefits. The insurance company takes the responsibility of investing the investments and all the policy holder needs to worry about is paying the premiums. The long term performance of whole life policies is comparable to growth of the major stock indexes with much lower volatility.
Simple Issue Life Insurance
- Good: Very few medical questions.
- Bad: Premiums are a little higher.
Simple issue Life Insurance is one of the most common solutions for individuals that have had some medical challenges and want to ensure they have some coverage in force. Not all policies are created equal and most companies have different questions on their applications. It is very important you are honest with your broker so they can help choose the right insurance carrier.
Guaranteed Issue Life Insurance
- Good: Guaranteed coverage.
- Bad: Lower benefit amounts and higher premiums.
Guaranteed Issue Life Insurance is a common staple of the over age 60 life insurance market in Canada. If an individual has had medical issues or a previous decline and needs to have coverage in place, they can apply for Guaranteed Issue Life Insurance and put a policy in place. This is non-medical life insurance for Canadians – always use a broker to get the best pricing.
Special Risk Life Insurance
- Good: High limit Life Insurance.
- Bad: Fewer guarantees and contractual privileges.
Special Risk Life Insurance is designed for Canadians that can’t get insurance through the traditional insurers due to medical history, dangerous avocations, recreational activities or foreign travel. Special Risk Life Insurance can also be used for executives and business owners that need very high limit coverage for a short period of time to insure a business deal, shareholder’s agreement or special project.
Shareholder Life Insurance
- Good: Protect financial & business interests.
- Bad: Business partners could learn about each others medical challenges if declined or rated.
Shareholder and key person insurance is a funding mechanism designed to create cash for a business when its needed most. The death of shareholder or key person will have a significant financial impact on the remaining shareholders as they will have to ‘buy out’ the deceased partners estate and depending on the current state of the financials, may not have available cash or credit. The loss of a key person can significantly affect the profitability of the company.
Shelter Bay Financial Corp 1.888.498.5288