Let’s Understand Life Insurance!
No! Life insurance is not the same as home or car insurance.
Yet, most of us will base our decision on price when shopping for life insurance. This logic works wonders when protecting your home or car, but not when it comes to people. To begin with, few actually know how to differentiate the three types of life insurance.
Term Life Insurance
Usually offered in 10, 20 or 30 years terms, term insurance works pretty much like your car insurance: you pay each year in case something happens. Once the term is over you can most certainly renew your protection (at a higher premium), but the money you paid is gone forever.
Permanent Life Insurance
Getting permanent insurance (instead of term) is similar to buying a house (instead of renting). The amount of each premium and the number of payments are fixed and defined by contract. Some products even pay out dividends to the owner in the form of participations.
One could therefore invest in a permanent life insurance over 10 or 20 years, after which the policy is paid for and will stay active over his lifetime, therefore providing a tax shelter for all future participations.
However, all permanent insurances are not participating and rates of return vary from one company to another! It is essential to look beyond premiums and assess what is the real return on your investment.
Universal Life Insurance
Universal insurance basically works like a house with a basement, where the ground floor is the insurance component and the basement is a room in which you can hide investments. While you are paying your premiums, this type of insurance allows you to make extra contributions within the policy.
Why would one pay extra for his insurance? Because surpluses can be invested through distinct funds in a tax-sheltered environment. While returns are more volatile, universal insurance offers increased flexibility in regards to contributions and investment portfolios.
Universal insurance can therefore serve as a second TFSA and, for a company owner, as a way to avoid the 51% tax on investment revenues.
Which is best?
It really depends on each and everyone’s situation. The cheapest, in terms of premiums, is term insurance. This being said, it is nothing more than an expense.
When integrating permanent insurance in a wealth management plan, it definitely acts as an investment rather than an expense, and offers protection to one’s family or business associates. However, premiums will be higher than term insurance for the same coverage.
Last but not least, universal insurance is very interesting. The premiums can be similar to term’s, while offering a tax-shelter for investments.
Which one should you choose?
Now this is the question! However, it is a question better answered over a cup of coffee than on a blog. If this is something you are pondering over, you might want to act sooner than later. Tax rules regarding life insurance will change at the end of the year and, as you might expect, it will be in the government’s favour. Till next time!