Life insurance is a valuable investment that brings peace of mind. It serves as a financial safety net for your loved ones, paying them a lump sum of money upon your death. However, some life insurance policies provide benefits beyond the coverage amount.
Continue reading to find out all how life insurance provides valuable benefits.
What are the benefits of life insurance?
Here are 7 important benefits that life insurance can provide:
- Life insurance proceeds are tax-free
If you pass away while your policy is still active, your beneficiary will receive a lump sum payment. This payout doesn’t have to be reported as taxable income on a tax return. Also, unlike wills, life insurance usually does not go through probate, which may take anywhere from three months to more than a year. This means your beneficiary will receive the payout within a few weeks after your death.
- Life insurance provides financial support
Life insurance can help your loved ones deal with the financial impact of your death. The payout could help pay everyday bills, cover future expenses, or might allow your spouse to work part-time if they need to spend more time with the children.
- Life insurance can cover your debts
When you pass away, your mortgage does not just vanish. Life insurance ensures that your spouse will be able to pay off the mortgage debt if you die unexpectedly.
- Life insurance can cover funeral costs
Since funerals can cost several thousand dollars in Canada, you may not want to burden your loved ones with the expenses when the time comes. That is where a funeral insurance policy — a small permanent life plan designed to cover end-of-life expenses — can come in. It allows families to deal with grief without worrying about burial costs.
- Life insurance can supplement your retirement savings
Besides providing death benefits, whole life and universal life policies build cash value. You may use it for anything, such as a down payment on a house or to cover an unforeseen bill. You can also use the cash value to supplement a qualified retirement plan, like an RRSP.
- Life insurance can serve as loan collateral
If you are a business owner in need of a business loan, having a life insurance policy might help you acquire one. In fact, lenders commonly request that life insurance be used as collateral for a business loan. While both term life and permanent life policies can be used as loan collateral, many lenders prefer a permanent life plan that has a cash value. The cash value is an asset in itself, like a car or a home. Collaterally assigning such a policy ensures the lender that it will receive its money if you default or die early.
- Life insurance can help with estate planning and business succession planning
Life insurance is an effective tool that business owners can use for buy-sell agreements or estate equalization to ensure a smooth business transition. Life insurance can also play a vital role in estate planning by helping you manage certain expenses (like probate costs, legal fees, etc.) which can chip away at the inheritance you want to leave to your loved ones.
What is permanent life insurance?
Permanent life insurance provides coverage for as long as you live (assuming you pay your payments on time). Alongside lifelong protection, most permanent policies also include a savings element known as cash value. Your policy’s cash value grows tax-deferred — meaning you will only pay tax on it when you withdraw it — at a fixed or flexible rate.
Your beneficiaries receive the death benefit when you pass, while the cash value is for you to use during your lifetime. You can access the latter in different ways, including by taking a policy loan, making a withdrawal, or surrendering the policy. In most cases, any unused cash value at the time of your death goes to the insurer — not your beneficiaries.
Whole Life Insurance
- Provides lifelong coverage and builds cash value
- Has level premiums (i.e. you will pay the same premium throughout your lifespan)
- Grows cash value at a fixed rate set each year by the insurance company
- May pay annual dividends
Universal Life Insurance
- Lasts your entire lifetime and builds cash value
- Allows you to raise or lower premiums and adjust the death benefit (within set limits) as your circumstances change
- Doesn’t grow cash value at a fixed rate; instead, it may grow faster or slower depending on the insurer’s market rate
- Doesn’t pay annual dividends
- Allows you to use the policy’s cash value to pay premiums
- More affordable than whole life insurance
What is term life insurance?
Term life insurance is a valuable insurance policy with a specific duration, known as the policy term. If you pass away during this period, it provides a death benefit to your beneficiaries. After the policy term is up, your coverage expires, unless you renew it.
Typically, term life policies come in 10, 20, and 30-year lengths. You should pick the term length that best meets your financial needs. For example, if you are buying life insurance to cover the years till retirement, which will be 18 years from now, a 20-year term plan might be a good fit.
Unlike permanent life plans, term life policies do not include a savings component. Because term life insurance serves only one purpose, i.e. to provide financial help to your dependents after your death, it is often called the purest form of life insurance. Term life insurance is much less expensive than permanent life insurance.
The benefits of different types of life insurance
There are two forms of life insurance: term life and permanent life. Term life insurance lasts for a set period and pays out if you die within that period. Once your policy term is over, you must renew coverage, buy a new policy, or go without life insurance.
There are two main kinds of permanent life insurance: whole life and universal life. Both of them build cash value and come without an expiry date. Universal life is cheaper than whole life and offers more adjustable premiums and death benefits, but has fewer guarantees. Whole life insurance, in contrast, has fixed premiums and death benefit and grows cash value at a predetermined rate.
The benefits of Term Life Insurance
- Provides coverage for only those years that you need it
- 5 to 15 times cheaper than permanent life insurance
- A good option for covering your mortgage (and other debts)
- Simpler to understand
- You may be able to convert it to permanent life insurance if your life insurance needs change
The benefits of Whole Life Insurance
- Gives you peace of mind that your family will receive the policy proceeds regardless of how long you live
- Provides you with an opportunity to grow your money in a tax-sheltered account at a fixed rate
- Can play a vital role in estate planning and business succession planning
- Makes it easier for business owners to secure a business loan
The benefits of Universal Life Insurance
- Offers the flexibility to adjust the premium payments and death benefit
- Lets you decide how the money in the in-built savings account is invested
- Has the potential to accumulate more cash value than a comparable whole life policy
- More affordable than whole life
Comparing different types of life insurance
Both term life and permanent life insurance can provide a financial safety net for your family when you die. However, permanent policies like whole life and universal life includes benefits that can help you as well.
Not sure which type you need? Let Dundas Life help you. Our experts will take time to learn about your needs, explain the best option for your unique situation, and help you secure the right coverage at a great price.
Frequently Asked Questions
Is a Term Life policy better than a Whole Life policy?
It’s really not about which one is better, but rather what your personal needs are. If you need life insurance only during your working years, a term life insurance is a smart option. On the other hand, if you have a lifelong dependent or want to use your insurance as an investment tool, a whole life plan will suit your better.
What is the difference between Health Insurance and Life Insurance?
Health insurance helps you cover medical expenses you incur due to illness, while life insurance provides your dependents with a lump sum upon your death.