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Life Insurance
Life Insurance
Life insurance is a financial tool that can assist your loved ones in coping with the monetary consequences of your demise. The payout from a life insurance policy, commonly known as the death benefit, is a tax-free, lump-sum amount that can be utilized for various purposes, including:
- Replacing your income to ensure that your family can maintain their standard of living
- Providing for your children or dependents’ future expenses
- Covering the cost of funeral expenses
- Paying off your debts
- Making a charitable contribution
Furthermore, you may elect to allocate the payout to your estate or a trust.
Term life insurance
Term life insurance provides a death benefit if the insured person passes away within a specified period or before reaching a certain age. The length of coverage can either be for a fixed period, such as ten or twenty years, or until a specific age, such as 65 years old. If the insured person dies within the policy term, the death benefit is paid to the beneficiaries. When the term ends, coverage ceases, and beneficiaries do not receive any payment. Unlike permanent life insurance, term policies do not accumulate any cash value, and you cannot borrow against them or receive any cash value if you cancel the policy. Some term policies can be renewed, but premiums may increase when the policy is renewed. For instance, premiums may rise every five years on a five-year renewable policy. Non-payment of premiums may lead to cancellation of the policy by the insurance company. When you purchase the policy, the insurance company sets the premiums for the duration of the term. Term life insurance premiums are typically lower than permanent life insurance premiums at the policy’s inception.
Term life insurance options for couples
When considering purchasing life insurance as a couple, it is essential to evaluate the existing coverage through your employer or the policies you may have purchased individually. If you decide to buy insurance, it is crucial to explore all the available options and weigh the pros and cons of each option.
Joint first-to-die term insurance covers two people under one policy and pays the death benefit when the first partner dies. This type of policy provides the same coverage for each partner and is usually less expensive than two identical single policies. However, joint policies may be less flexible if the couple separates or divorces, and the policy cannot be divided. The policy usually pays only one death benefit, so if one partner dies, the other partner needs to apply for a new policy to continue the coverage.
Single term insurance, on the other hand, provides individual policies for each partner with their own coverage amount. While the total cost of two single policies may be higher than a joint first-to-die policy, it offers more flexibility. It is relatively easy to change the beneficiary if the couple separates or divorces.
Permanent life insurance
Permanent life insurance provides coverage for the entirety of your life, which means that your beneficiaries will receive payment upon your death while the policy is in effect. In addition to the death benefit, permanent life insurance policies also accumulate a cash value over time. If you decide to cancel your policy, you may receive a cash value payment, which will be less than the total amount you paid in premiums. Some permanent life insurance policies allow policyholders to take out a loan using the accumulated cash value as collateral. However, if the loan is not repaid, it may decrease the amount of money that your beneficiaries receive or the amount you receive if you cancel the policy.
Whole life insurance
Whole life insurance is a form of permanent life insurance that offers lifetime coverage. Unlike term life insurance, premiums for whole life insurance do not increase as you age. Moreover, a guaranteed minimum cash value is commonly included in your policy.
Universal life insurance
Universal life insurance is a form of permanent life insurance that blends life insurance with an investment account. The investment account has a cash value, and it’s possible to make withdrawals or take out loans. The death benefit and cash value of your investment account can fluctuate based on the types of investments you hold in your account and the returns on those investments. You have the ability to choose how your premiums are invested, and you can adjust your premiums within the limits set in your insurance policy. Keep in mind that your premiums may rise if the returns on your selected investments decrease.
Naming a beneficiary
A beneficiary is the person who receives the payment from your life insurance policy after you pass away. You have the flexibility to name your spouse, family member, friend, or charitable organization as the beneficiary of your policy. It is possible to name more than one beneficiary for your life insurance policy, and your insurance company will divide the death benefit among them. You may allocate different proportions of your life insurance benefits to each beneficiary. If your beneficiary is revocable, you can change the beneficiary at any time without notifying them. However, if your beneficiary is irrevocable, you must obtain written permission from the irrevocable beneficiary before making any changes. In Quebec, if you name your spouse as the beneficiary, the designation is automatically irrevocable. You must explicitly make it revocable when you first designate your spouse in Quebec.
Naming a beneficiary who is under legal age
In the event that your named beneficiary is underage at the time of your death, you may consider establishing a trust and designating a trustee or administrator to hold the proceeds of the death benefit on behalf of the minor. Failure to designate a trustee or administrator will result in the death benefit, plus any interest accrued, being held in trust by the province or territory until your beneficiary reaches legal age. It is recommended to seek advice from a lawyer or financial advisor for further guidance on this matter.
Naming your estate as the beneficiary
Naming your estate as the beneficiary of your life insurance policy means that the death benefit proceeds will become part of your estate and will be distributed according to the terms of your will. However, this option has some potential drawbacks to consider. Firstly, the death benefit may be subject to estate taxes, which could reduce the amount your beneficiaries ultimately receive. Additionally, if you have outstanding debts when you die, creditors may claim a portion of the death benefit to pay off those debts. It’s important to keep these factors in mind when deciding whether to name your estate as the beneficiary of your life insurance policy.
How to name a beneficiary
When purchasing life insurance, it is crucial to designate a beneficiary for each policy form. If you fail to do so, your insurer will consider your estate as the default beneficiary. It is advisable to designate an alternate or contingent beneficiary who will receive the death benefit if the primary beneficiary dies before or at the same time as you. It is essential to review and update your beneficiary designations periodically.
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