If you want a basic understanding of your life insurance options, here’s the 101. All life insurance plans start with the same basic precept. The policyholder pays a premium in exchange for a tax-free lump sum benefit that’s payable to their selected beneficiaries upon their death. But there’s more! Because life insurance enjoys favourable tax treatment under the Income Tax Act¹, it’s a valuable financial instrument that can do more than just pay a lump sum death benefit. Most Insurers design plans that offer features and benefits—added value for consumers that comes at a premium.
As always, we’re here to help you sort out your insurance needs and get the insurance that best suits your circumstances. But if you want the 101 on the options, we’ve separated the plans into five main categories below. Check them out!
Outlay
$ (short term) | $$$$$ (long term)
Plan
Typically, terms of 10, 15, 20, 25 or 30 years and custom terms are available or custom periods are available.
Premium
Level for the selected term. Increasing at each renewal. The longer the selected term, the higher the premium for the term.
Main Draw
Low initial costs on shorter terms – increasing as the length of term guarantee increases.
Drawbacks
Typically, life insurance needs evolve and outlast the initial term. Premiums increase dramatically at each renewal (though healthy individuals can often obtain a new less costly plan at renewal). Most Term insurance plans also expire before life expectancy.
Where it fits
For short-term, temporary needs.
Outlay
$$ (T100) | $$$ (T100+)
Plan
Level guaranteed death benefit (T100+ plans can include cash values).
Premium
Guaranteed level for life, paid up at age 100.
Main Draw
Most T100+ plans include the following in years 11+: a guaranteed annually increasing cash surrender value, a policy loan feature, the option to use the cash surrender value as collateral for a third-party loan, and a reduced, fully paid-up amount of insurance coverage for life, should you stop paying premiums early.
Drawbacks
Lacks premium flexibility, so if you miss a premium, the policy will lapse (though some T-100+ plans offer options to cover missed premiums with the cash surrender value).
Most budget-friendly of the permanent plans but lacks investment and growth potential that makes other permanent plans more cost effective in the long-run.
Where it fits
For permanent needs, on a tight budget.
Outlay
$$$
Plan
Level guaranteed death benefit and guaranteed insurance cost.
Premium
The policyholder pays the minimum required premium (or more, subject to the maximum amount allowed under the Income Tax Act). Cost of insurance (COI) charges are deducted each month. COI options are Level or Yearly Increasing (YRT). Both are fully paid up at age 100.
Main Draw
Contractual Guarantees and choices including type of insurance charges.
These plans include a tax-deferred Accumulation Fund¹ with various investment account options allowing for pre-funding COI, policy loans, withdrawals, third-party borrowing (using the cash value as collateral), tax-free Disability Benefit, and tax-free payout to beneficiaries in the event of death.
Overall flexibility in future choices and planning options.
Drawbacks
Investment Choices need to be managed and monitored by policy owner.
Where it fits
For permanent, evolving needs and additional tax efficient pre-funding.
Outlay
$$$$
Plan
Level guaranteed premiums and death benefit.
Premium
Premium options include level for life and quick pay options (Level for 10, 15 or 20 years) when the policy becomes paid up.
Dividends and policy cash values can also be used to offset premiums.
Main Draw
Includes the highest annually increasing guaranteed cash surrender value of all permanent plans.
Annual dividends provide value for consumers that are tax efficient, for accumulating and growing the value of the policy including the Death Benefit and the Total Cash Surrender value.
Cash surrender values allow for policy loans, automatic premium loans if a premium is missed, third party borrowing (using the policy as collateral) and cash surrenders when a portion or all of the insurance is cancelled.
Drawbacks
Typically, the highest premium of all plans
No investment option flexibility like with Universal Life
Less overall flexibility
Where it fits
For permanent, evolving and increasing insurance needs.
Outlay
$$$$
Plan
There are a handful of Hybrid policies that combine features from Universal Life and Whole Life.
Main Draw
These plans include Whole Life like features such as:
- annually increasing guaranteed cash surrender values, and
- annual credits or bonuses (in lieu of dividends) that can be used to purchase fully paid up additional coverage (PUA) that increases the death benefit and has its own annually increasing guaranteed cash surrender value.
- Some also allow policyholders to purchase additional PUA coverage with additional payments.
They also include Universal Life features such as:
- an Accumulation Fund¹, and
- a tax-free Disability Benefit.
Drawbacks
Annual credits or bonuses are based on investment experience only, whereas with whole life, insurers also consider favourable experience from expenses, taxes, mortality, and lapses when establishing their annual dividend.
Where it fits
For permanent, evolving and increasing insurance needs.
Source: The Link Between, February 2, 2022
Contact our office to learn more or to discuss which life insurance option may be right for you.
References
¹ Along with the tax-free death benefit, the tax treatment of Canadian exempt life insurance policies includes tax-deferred accumulation. When there is a disposition of the life insurance policy (for instance on withdrawal, surrender, or policy loan) or when a dividend is paid to the policyholder, taxation may apply. Ask us about the taxation of life insurance policies.
This article was prepared by The Link Between. This is not an official publication of Investia Financial Services Inc. The views (including any recommendations) expressed in this article are those of the author alone and are not necessarily those of Investia Financial Services Inc.
