What are the Three Types of Life Insurance?

In general, the main types of life insurance policies include term life, whole life, and universal life insurance. The main difference is that term insurance is temporary, while universal and whole life plans are both types of permanent life insurance.

As you can see in the chart below, each type has different features such as cost, length, cash value, and death benefit.

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What is Term Life Insurance?

Term life insurance policies cover you for a particular number of years, usually 10, 20, or 30 years. If you pass within the length of the term, your beneficiary will receive the face value, also known as the death benefit. This amount can be given as a monthly payment, an annuity, or a lump sum.

With term life insurance you can guarantee you will have coverage during the years you are likely to need it most. This is often the best choice for new families, young healthy individuals, or people looking for the most affordable option. In the event that they pass away, term life insurance can help them to:

• support young children
• support a surviving spouse
• cover college debt
• cover mortgage payments

Pros:

• Term life insurance is the most affordable type of life insurance because it only lasts for a fixed duration.‍
• If you pass away before the term is up, your family receives a set amount of money. The face value, also known as the death benefit, gets paid as a monthly payment, an annuity, or a lump sum.
• With level term insurance the fees and death benefit amount stays the same throughout the term.
• Simplest to understand of all types of life insurance

Cons:

• If you survive the length of the term, your policy will expire and your family will not receive the death benefit.
• Does not include a savings component.

Best for:

• Parents of young families. In the event that one parent passes away, a term life policy can support the remaining spouse, helping them to care for their children during a difficult time.
• Someone with debt that will be paid off within a certain time frame, such as college debt or a mortgage. This ensure that if the individual passes away, the financial burden will not be passed to their loved ones.

When you sign up for term life insurance, you must specify the coverage amount and policy length. The life insurance company (e.g., Manulife, Sun Life, BMO, etc.) takes these details into account while calculating your premium rates. You can buy term life insurance online through an independent broker like Dundas Life.

What happens when it expires?

As your policy approaches its expiration date, it is a good idea to revisit your life insurance coverage needs. If your family no longer needs the financial protection of insurance, you can simply let the policy expire.

If you do need coverage, there are three options available:

1. Extend your current term policy:

‍More terms life insurance products/services are guaranteed renewable. That means you can renew your policy without getting another medical exam. When you sign a contract for a new life insurance policy, you are agreeing to pay the premium each month in order to keep the policy in force. ‍

2. Convert your term policy to a permanent life insurance policy:

‍Does your term policy have conversion riders or other related riders? If so, you can convert it into a permanent insurance policy without having to go through the underwriting process again.‍

3. Buy a different life insurance policy:

If you are healthy and fit, you can apply for a new coverage policy. However, expect to pay a higher premium rate as the cost of insurance increases with age. In addition, whether you are approved by an underwriter for support/funds depends on your risk and health conditions.

If you're not sure how much life insurance you need, let Dundas Life help you out!

What Is Whole Life Insurance?

Whole life insurance, or permanent life insurance or or cash value life insurance, provides coverage for a lifetime, as long as you pay the premiums on time.

Besides promising a set payout, a whole life policy includes an investment feature. A small share of your permanent life insurance premium payment gets deposited into a saving component called “cash value”. This works similar to a savings account.

Pros:

• Provides lifetime coverage.
• Includes a cash value that grows over time.

Cons:

• More expensive than term life insurance.

Best for:

• Parents or grandparents who want to maintain and grow the value of their estate, ensuring they have something to leave for their heirs.
• An individual of any age with a lifelong dependent such as a spouse, or child with a disability, who relies on them financially.

Your policy’s cash value grows with interest and earns a fixed return over time. This acts as a financial safety net to fall back on during uncertain times.

You can use your permanent life insurance policy’s cash value to:

• Pay your premiums
• Take out a policy loan (or loans) against it
• Withdraw it — partially or fully — to ease a rough financial patch

You can even surrender the policy in later years to live off its value, which is a great opportunity. A missed premium payment can cause the coverage to lapse.

Generally, a permanent life insurance policy costs more than term insurance policies due to its guaranteed payout and built in savings component or cash value.

When considering whole insurance policies, the life insurance company will assess a policyholder's ability to pay the premiums and take responsibility for budgeting. Our online life insurance calculator can help with this.

Types of whole life insurance:

1. Limited Pay Whole Life Insurance

With limited pay, you must pay premiums for a specific duration or until you reach a certain age. Once you reach the target age, your premium payments stop.

However, the life insurance benefits last your lifetime, and cash value keeps growing. The cash values of a life insurance policy can be very helpful because they can be cashed out when desired.

2. Term-to-100 Life Insurance

This insurance product offers you the best of traditional permanent life insurance and term insurance — life long coverage and affordable premium rates.

Term-to-100 life insurance policies are in effect for life, but its premiums are less expensive than permanent life insurance, which is standard. That’s because, unlike the latter, it doesn’t have any cash surrender value.

Both the premiums and the death benefits are level and unchanging, but your premium payments stop when you reach the age of 100 years.

3. Funeral Insurance

Funeral insurance, also known as burial insurance, is a type of permanent life insurance. In the case of your burial or death, your family—and any heirs or dependents—will receive income replacement from permanent life insurance policies. A funeral insurance policy, on the other hand, is designed to cover only your final expenses and funeral costs.

These plans can be advantageous for those with health issues who do not have other life insurance options and require assistance with funeral expenses.

4. Participating vs. Non-Participating

A participating type of life insurance policy allows you to share in the profits of the life insurance company, or life insurers, through dividends and participate in the insurance company and its ownership. In contrast, a non-participating policy provides just coverage — nothing else, no dividends, or ownership rights.

The main differences between participating and non-participating insurance is that participating policies provide coverage as well as ownership rights, whilst non-participating policies just provide coverage.

Since you receive a portion of the company’s profits as dividends in participating whole life, you typically pay more for coverage.

5. Variable Life Insurance

Variable life insurance is a type of whole life policy with an investment component. The policy includes a cash value account that is divided into several sub-accounts. A sub-account works in the same way as a mutual fund.

Variable life insurance policies are more volatile than traditional whole life policies and are only suitable for people who can bear the extra risk. It is good for people who want to be more involved in their investments—including in property, business and other security—with life insurance.

‍Reading reviews about different insurance policies and understanding the short-term and long-term differences, along with the risks, can assist in making an informed decision.

What Is Universal Life Insurance?

Universal life insurance, another type of permanent life insurance, is whole life with a twist. It provides lifetime coverage and builds cash value, but its premiums are flexible, death benefit adjustable, and cash value growth not guaranteed.

Pros:

• Provides lifetime coverage
• Includes cash value component
• Flexible premiums and death benefit amounts

Cons:

• Higher premiums than term life insurance.
• Cash value is not guaranteed to increase the way that it is with whole life coverage.

Best for:

• High-net worth individuals who have already used up other tax-deferred savings accounts, since they can use the policy's cash value as an extra investment tool.
• An individual of any age with a lifelong dependent such as a spouse, or child with a disability, who relies on them financially.

A universal life insurance policy has a minimum and maximum premium amount. It’s entirely up to you how much premium you want to pay, as long as it is with the prescribed range. This kind of flexibility can make it easier to maintain insurance, especially for people whose annual income isn’t fixed.

A cash value component is common in universal life insurance policies. The cash value growth in a universal insurance policy isn’t guaranteed. Instead, it depends on how much premiums you pay and how well the market is doing.

Your policy’s cash value earns interest that’s in line with the current market rate, meaning the rate (or rates) vary. While the insurance company guarantees a minimum annual interest rate, if the market does better than expected, your cash value will grow faster. Similarly, if you pay more premiums, your cash value will be higher.

You can also adjust the death benefit of your universal life insurance coverage within the plan limits. Generally speaking, you can lower the death benefit any time, but to increase it you must go through the underwriting procedure again, which includes a medical test.

Indexed Universal Life Insurance

Indexed universal life insurance is a form of permanent life insurance that provides both a cash value and a death benefit. Your cash value account balance can earn interest based on a stock market index, such as the S&P 500 (or TSX), chosen by your life insurance company.

Typically, these policies are suitable for those who have a significant initial investment and are looking for tax-free retirement solutions.

Term vs. Whole

If you want to leave a financial legacy or buy an insurance policy that is also a good investment tool, you may want to consider a whole life policy. Term life insurance, on the other hand, appears a better option when you are looking for an affordable way to protect your family financially until maturity.

Here’s a quick comparison of whole and term life insurance to help you decide which one is right for you:

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What is Joint Life Insurance?

Joint life insurance is a type of insurance policy that insures two people rather than one with a single premium payment each month.

When the life insurance money is not needed by a beneficiary until both of the covered individuals have passed away, joint life policies can be helpful in future estate planning.

This policy is not suitable if one would suffer financially if the other died. The remaining spouse does not get insurance payouts paid up until after both insured spouses have died.

What is Mortgage Life Insurance?

Mortgage insurance ensures your mortgage lender receives the balance of your mortgage. In other words, the payout goes to the mortgage lender rather than a beneficiary you select.

The payout amount is in line with your outstanding debt. That means it reduces over time as you pay down your mortgage. The insurance premiums, however, remain the same throughout the policy term.

With various coverage amounts available for customers, you can choose one that best suits your needs. Dundas Life insurance agents can assist in this process.

Given the inflexibility of mortgage insurance about who receives the death benefit, a term life insurance policy with ample coverage to take care of your mortgage may be a better deal. If the mortgage reduces, your beneficiaries will have some cash even after clearing the mortgage debt. They can also use the payout as they deem fit instead of paying down the mortgage in full.

All the same, mortgage life insurance has certain advantages. The most notable is that it doesn’t require you to undergo a medical checkup. If you have a severe health condition that makes insurance impossible, you have no choice but to take mortgage insurance to protect your home financially.

In certain situations, mortgage life insurance is mandatory. For example, if your down payment is less than 20%, the law requires you to purchase mortgage insurance.

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What is Group Life Insurance?

Group life insurance is one of the main types of life insurance that insurance company employers offer to their workers as part of their employee benefit plan through work. Like any other insurance product, group life insurance has certain advantages and disadvantages.

Three key benefits of group life insurance are convenience, acceptance, and price.

Sometimes enrollment to group life insurance is automatic; other times, it just requires filling up forms. Also, group life insurance doesn’t require a medical exam, which is particularly beneficial for workers who are older or have a severe health condition.

Additionally, it is much cheaper than other whole life products. Often the employer provides a certain amount of coverage — usually one to two times your salary — for free. If you take extra coverage, you’ll have to pay from your pocket.

As beneficial as group life insurance is, relying solely on it may not be a good idea — because you can’t take it with you.

If you switch jobs, you will lose coverage. Some insurers give policyholders the option to convert their group life insurance into individual life insurance if they leave, but the cost of insurance could shoot up dramatically. Also, a group life insurance product is a one-size-fits-all solution. You can’t customize it as per your needs.

What is the Best Type of Life Insurance?

So, do you want to purchase life insurance, and what type of life insurance is best for you?

It depends on your unique needs and situation. It may even make sense applying for multiple life insurance policies in some cases.

If you’re not sure which type of life insurance is right for you, or if you have any other questions about life insurance, contact an insurance advisor (or advisors). They can help you understand the different types of life insurance the best fit for your needs and budget or even for your employees.

There are many different categories of life insurance, but the two most common are whole life and term life insurance. There are several other articles that may be of use to you if you're looking for further material.

Get free life insurance quotes (or quote) with one of Dundas Life's advisors or customer services representatives. We initially started as life insurance experts in Ontario and now expanded Canada-wide. If you want more advice or tools, please feel free to talk to an agent. Anyone is welcome!

Conclusion

Choosing the right coverage for you and your loved ones is a vital decision that requires careful thought and planning. By understanding the various options available—such as term, whole, and universal coverage—and considering the factors most important to you, you can select the policy that provides the right level of protection for your unique situation. Whether you're looking for affordable, temporary coverage or a more permanent solution with added benefits, it's essential to weigh factors like cost, flexibility, and long-term security.

Life can be unpredictable, and your coverage needs may evolve over time. It's important to review your policy periodically to ensure it continues to meet your changing needs. As your circumstances shift, such as a change in family size, health, or financial status, you may need to adjust your coverage accordingly.

Ultimately, the right life insurance coverage offers peace of mind, knowing that your loved ones will be financially protected in your absence. By choosing the right policy, you’re not only securing their financial future but also making a thoughtful and proactive investment in their well-being.

Frequently Asked Questions (FAQs)

What is health insurance?

A health insurance policy is an agreement between a person and an insurance company whereby the insurance company agrees to cover a portion of the person's medical expenses in exchange for a premium. This is what it means to be insured. Health insurance often covers expenses such as doctor visits, hospital stays, prescription drugs, and even dental work. There are many ways that health insurance can help cover the costs of medical care. It is critical to maintain excellent health; nevertheless, certain things are inevitable, and health insurance can be really advantageous.

What is pet insurance?

Pet insurance is a coverage purchased by a pet owner that helps to reduce the overall costs of pricey medical bills. This coverage is comparable to health insurance policies. Pet insurance will cover the often expensive veterinarian operations, either totally or partially.

Is whole life insurance permanent?

Whole life insurance is a type of permanent life insurance. It provides coverage that lasts lifelong with the paid premiums. It also includes cash value as a savings component , which grows over time. Unlike term life insurance, whole life doesn't expire after a specific period, ensuring lasting peace of mind for policyholders and their beneficiaries.

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