Let's explore what life insurance actually is before we discuss its advantages (and how it works in Canada).
Life insurance is essentially a contract between you and your insurer; in exchange for regular premium payments (often monthly or annually), your insurer agrees to pay out a death benefit in the event of your passing. This lump-sum payment is made to the beneficiaries you designate, who may be anyone (e.g. child, spouse).
Term life insurance and whole life insurance are the two primary categories of life insurance. Only a specific amount of time is covered by a term life insurance policy. But, if you continue to pay your premiums, a whole life insurance policy will cover you for the rest of your life. Each of these has a unique set of advantages, which we will discuss later.
The Top Benefits Of Life Insurance 2023
While there are countless benefits to purchasing a life insurance policy, here are four main reasons to do so.
1. Protect your loved ones financially
While it’s obvious that life insurance is there to protect your loved ones financially, all the different ways a death benefit can be used might not be as obvious. Your beneficiaries can apply the lump sum to anything they want, including:
- Replacing your income for regular living expenses
- Paying down the mortgage for the family home
- Paying off any leftover debt (e.g. credit card debt, car loan)
- Building a college fund for your child’s future education
2. Cover the final expenses
Any last costs, such as those associated with the funeral, the burial, or the cremation, may also be covered by the death benefit. In Canada, funeral expenses can reach $10,000 or more; having a life insurance policy can assist reduce the financial strain that comes with losing a loved one.
3. Ensure a tax-free death benefit
A death benefit from a life insurance policy is typically also paid out tax-free. Your loved ones will have extra money to use for necessary costs because the money won't be shown as income on their tax returns.
The tax-free life insurance rule does have a few exceptions, though. For instance, if you take cash value out of your policy, the investment gains may be subject to taxation.
4. Receive peace of mind
Lastly, the benefits of life insurance aren’t limited to financial factors – they can be emotional too. Knowing you have the right coverage in place in the event of your passing can be enough to make the premium payments worth it.
Benefits of term life insurance
The most common kind of life insurance, term life insurance provides your loved ones with temporary financial stability for a predetermined amount of time (e.g. 10 years). Here are some of its advantages.
1.Easy to understand – Term life insurance is generally simple to understand, in contrast to many whole life policies. You get to pick your own term as well as your own death benefit. Let's imagine you wish to purchase a $500,000 policy that will pay out in full if you die away during the following ten years. Your beneficiaries would receive this amount in full.
2. Generally affordable – Short life insurance is typically far more economical than full life insurance. If you're searching for inexpensive coverage to meet short-term needs, this is a suitable alternative because insurers aren't obligated to pay anything (e.g. you have an outstanding mortgage). Premiums can even start at around $20 per month if you buy a coverage when you're young and healthy.
3. Level premiums – The costs of term life insurance are similarly leveled. This implies that if you secure a low rate at age 25, you won't have to worry about it rising throughout the course of your policy's term. But, keep in mind that because to your advancing age, you will probably be given higher rates after your policy expires.
4. Renewable and convertible – Term life insurance's adaptability makes it a suitable place for first-time customers to start. Most policies are renewable or convertible life insurance plans, which means that when the term of your policy approaches its expiration, you can choose to either extend your coverage for another term or convert it into a permanent plan.
Benefits of whole life insurance
On the other hand, if you're searching for security that lasts a lifetime, whole life insurance can be exactly what you need. The key advantages of this permanent life insurance product are listed below.
1. Guaranteed death benefit – Because you'll have coverage for the duration of your life, your insurance provider is obligated to pay out a death benefit when you pass away. Of course, this is assuming that you pay all of your regular premiums on time.
2. Cash value accumulation – The whole life insurance's ability to build cash value is one of its main advantages. A portion of the money you spend on regular premiums will go toward increasing your cash value reserve. Over your lifetime, you will have access to this money in a variety of ways, such as a loan, to pay premiums, or just to withdraw the money. You may also get some money back from the policy's cash value if you decide to discontinue your coverage (also known as surrendering the policy).
3. Possible dividends – A particular kind of whole life plan called participating life insurance enables you to get dividends from the investments your policy is invested in. Dividends can be utilized in a number of ways, albeit they aren't guaranteed. For instance, you can use them to pay your premium, boost your cash value, or raise your death benefit.
4. Flat premiums – Like term life insurance, the majority of whole life plans offer level premiums, so you won't have to be concerned about rising costs once your policy is locked in. The price for universal life insurance policies, another kind of permanent coverage, could change throughout the course of your lifetime.
Life insurance with living benefits
While most people purchase coverage to ensure their loved ones are financially protected after they die, life insurance can also come with living benefits – these provide financial support while the policyholder is still alive.
Living benefits come attached to your life insurance policy as a rider. While they may already be included in some cases, more often than not, it’ll come at an additional cost. Here are a few common types of living benefit riders:
- Chronic illness rider
- Critical illness rider
- Terminal illness rider
- Long-term care rider
You’ll be able to withdraw a portion of your policy proceeds during a specified financial emergency. The funds can be used for related expenses, such as income replacement or at-home care. The drawback? It may also reduce your death benefit.
The bottom line
Having a life insurance policy provides benefits that go beyond payment to your loved ones after you die. To find out how much (or how little) you'll be paying for your personalized coverage.
