Life insurance is an essential part of your financial plan. It gives your loved ones access to money when they need it most, protecting them from substantial expenses, like covering mortgage payments, debts, and final expenses.
Life insurance is financial preparation for the unexpected when something doesn’t go to plan. It is comforting to know that your loved ones are protected when this happens. But it’s essential to know the ins and outs of how it works before committing to a policy.
Here are the basics of understanding life insurance, what coverage is right for you, and how it fits your financial plan.
How does life insurance work?
Life insurance protects your loved ones from a financial loss if you, a primary financial contributor, die unexpectedly. It is a contract between you and an insurance company. You pay a monthly premium for a lump-sum payment to the beneficiaries after you pass away.
There are multiple policy options available depending on your needs. Your insurance provider will ask about no medical or traditional insurance, the length of the insurance policy, and your coverage amount. Your monthly payments are dependent on which plan options you choose and the lump sum payment you wish to leave.
Who are the parties involved in a life insurance policy?
When you talk to an insurance advisor, some terms are essential to know. The insurance contract has three parties named: the policyholder, the insured, and the beneficiary.
The policyholder is the person who owns the policy, typically the person who pays the premiums. The policyholder decides the beneficiaries and is the only one that can change them.
The insured is the person covered by the policy. If the insured passes while covered, the lump sum is paid out. The insured may be the policyholder but does not have to be. For example, a wife can purchase a policy for her husband. This makes the wife the policyholder and the husband the insured.
Finally, the beneficiary or beneficiaries are the person, people, or institutions that receive the death benefit. The policyholder determines the beneficiaries. They can be a spouse, children, charity, or grandchildren.
What types of expenses can life insurance cover?
There are many types of financial needs at death. Since your life insurance policy results in a lump-sum payment, your beneficiaries can use the money for their expenses and financial needs. It is a safety net to ensure that they can maintain their lifestyle, stay in their home, and financially adjust to life without you.
The payment can help with:
- Final expenses (funeral and cremation costs, lawyer’s fees, and taxes)
- Outstanding loans (mortgage payments, car loans, line of credit)
- Lost income
- An emergency fund to tide your family over through a difficult time
- Covering your children’s education
- Supporting your favourite charity
What is the difference between term and permanent life insurance?
There are two basic life insurance policies: permanent life insurance and term life insurance.
Term Life Insurance covers the insured for a set term. Generally, it protects over 10, 20 or 30- year terms. At the end of the term period, the insurance may end, or you may be able to extend it for another term, but your premium may increase. You may also be able to convert your term insurance policy into a permanent insurance policy.
A term policy typically has lower initial premiums than permanent insurance. Usually, the shorter the term period, the lower the initial premium.
The policy only pays the death benefit if you die during the policy term. If you live beyond the term period and the policy is not renewed, the term plan will lapse, and no death benefit will be paid.
Permanent life insurance provides coverage for your entire life if you continue to pay the premiums. It does not have a set term. A permanent policy allows you to lock in your premium at the rate you purchased the policy.
A permanent policy costs more than other types of insurance since it offers protection for a lifetime and comes with a guaranteed payout. It usually provides a partial refund of premiums if, for some reason, you decide to cancel your policy before you die. Some permanent plans also offer a “cash value,” which allows you to borrow money from a portion of your policy that builds interest in case of emergencies. However, term policies do not offer cash value.
What is the difference between no medical and traditional life insurance?
Insurance companies have different ways of assessing risk. The two broad approaches are “Traditional insurance” and “No Medical or Simplified Issue Insurance.”
No Medical & Simplified Issue insurance is typically underwritten with just a few medical questions, no doctors, and no tests. Even if you have poor health, you can still get coverage. It typically takes just a few days to be issued. This type of insurance tends to be for smaller amounts of insurance or applicants who have more health issues. And it is often only available in one plan type – smaller amounts of permanent insurance.
Traditional insurance is underwritten or assessed by an insurance company using an application that may be 20 to 40 pages long, with medical tests and doctor’s reports. It typically takes four to six weeks to be issued. This type of insurance tends to be less expensive for healthier applicants who want a larger payout.
The importance of life insurance
A life insurance policy can provide financial security when dealing with the loss of a loved one. The lump-sum benefit can help cover unexpected expenses like funeral costs, and outstanding debts passed on by the deceased, or day-to-day expenses like childcare, tuition, mortgage payments, or utility bills.
Canada Protection Plan specializes in No Medical & Simplified Issue life insurance. We offer more substantial insurance payouts – up to $1,000,000 – with both permanent and term insurance options.
We have simplified underwriting options, from just a few simple questions for an applicant with severe health issues to what we consider to be the simplest form of traditional underwriting for a healthy applicant.
Our Licensed Insurance Advisors will help you determine the right insurance option. Call today, and one of our advisors can answer all your questions and help you complete the necessary applications to obtain the insurance you need.