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Types of Life Insurance

Almost all life insurance falls into two main categories – term insurance or permanent insurance with permanent often referred to as whole life insurance or cash value insurance.

Both types of insurance require premiums and both pay the face amount upon the death of the insured. But they have some distinct differences. Clink on each of the types of insurance for more information.

Term Insurance

Permanent Insurance

Whole life and other types of permanent coverage are more complicated than term policies. The coverage is for life with no time limit, and premiums generally are set for life at the time of purchase, meaning they will never be increased, no matter what happens.

Initially you pay much more than with a term policy. The difference can be viewed as a reserve that is used partly to cover the higher premium requirement in future years. At some point the reserve may even cover all future premiums, at which point the policy is said to be paid up.

The reserve is also used to generate a cash value for policyholders. This cash value can be used in a number of ways:

  • You can borrow from the insurer, usually up to 90 per cent of the balance.
  • You can use it to pay your premiums for a while, sometimes at reduced face value.
  • You can discontinue coverage and convert the cash value into income.
  • You can cancel the policy and receive the cash surrender value (generally the same as the cash value).

Because of the cash value aspect, whole life is often referred to as life insurance with a savings component. But shortcomings in regular whole life policies - particularly their low effective yields - have prompted the industry to introduce a few variants:

Term-to-100

Despite the name, this is really a permanent contract. You pay fixed-level premiums and receive coverage to age 100. If you live to age 100, the policy terminates but you receive a cash payment equal to the face value or more (depending on contract terms).

Many Term-to-100 policies do not have a cash value per se - one that can be accessed during the life of the policy. As a result, Term-to-100 is sometimes described as stripped-down whole life, and is much less expensive than whole life. It has become popular since its introduction in 1979, and accounted for about 8 per cent of all new individual life insurance policies sold in Canada in 1997.

Universal Life

First introduced in 1982, this type of policy keeps the savings and insurance components completely separate. Within policy limits, you can decide how much or how little you want to pay into the reserve, or even pay a single premium to fund the entire policy. You have some choice over how the reserve is invested, and can withdraw cash from it, not just borrow against it. You can adjust the premium and the face value. Universal Life is a direct industry response to the buy term and invest the difference argument, and it has become very popular as well.



 
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