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Life Insurance 101 : Learning the Basics of Life Insurance

Published July 6, 2023

This post is all about learning the basics of life insurance. You’ll learn what life insurance is, and what kinds of options you have available to you when purchasing it. By the end of this article, you’ll have the basics down, and will have a much smoother time navigating the world of life insurance. But don’t worry - while you can learn the basics here, our life insurance advisors are available to walk you through every step of the way, and are happy to answer any questions you may have.

Entering the world of life insurance can be intimidating. With confusing industry jargon, dizzying fine-print and legalese, and seemingly endless options to choose from, you might (understandably) have some questions.  “What kind of protection do I need? What is being offered? How much should I be paying? How much will I receive?” These are all common questions that we get from folks shopping for insurance. 

All these questions lead to life insurance seeming more complicated than it actually is, and can push people away from the idea altogether. That’s why we’ve built this Life Insurance 101 blog post.

What Is Life Insurance?

In short, a life insurance policy is a contract that pays out an agreed upon lump sum of money in the event that a certain condition is met – usually in the event of the policyholder’s death, but sometimes also in the event of a critical illness or disability, depending on the policy.

In many situations, life insurance is a piece of financial protection that people buy for their families and beneficiaries so that they aren’t burdened by the sudden loss of income that can come with someone’s death.

But life insurance isn’t always limited by the death of the insured. It can also be used to protect your own assets or your income in the case of a non-fatal accident or a debilitating illness. This post will go into more detail on the different use cases of life insurance so that you fully grasp what it can do and which types of polices may be right for you.

There are different kinds of life insurance that offer different types of coverage according to your needs. Just as how your life is unique, so are your insurance needs. That’s why there’s something for everyone, and picking life insurance that suits your life circumstances is critical.

But don’t worry, it’s pretty simple! There are 2 main categories of life insurance: Term Life insurance and Permanent Life insurance. So let's get started with learning the basics of life insurance!

 

Learning the Basics of Life Insurance: Term Life Insurance

Term Life Insurance is the most straight-forward life insurance option. The most important points for term life insurance are that:

  •   It covers you for a “term”, or an agreed upon period of time. If you pass away during this term, your beneficiaries receive your death benefit. Terms are often 10,20, or 30 years.
  •   Once your term ends and you’ve made all your payments, your coverage expires.
  •   The death benefit is, in most cases, not taxable in Canada.
  •   It is the most affordable form of  life insurance, with low premiums, but depending on the policy, can come with fewer features compared to Permanent Life Insurance.

Term life is generally a good choice for people who are seeking coverage, but still want a reasonably affordable insurance premium. It’s also an ideal choice for those who need coverage most during a defined period of time, such as parents with young children, or even adults who are at least in part financially responsible for their elderly parents.

Of course, term life insurance comes with some risks. The main one being that it is valid only for a limited term. If you’re still alive after your term expires, then your policy expires, and you won’t be protected anymore.

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Learning the Basics of Life Insurance: Permanent Life Insurance

Permanent Life Insurance is the other, more expensive life insurance option you’ll find. So what makes permanent life insurance special?

  •   It covers you for your whole life (as the name indicates). Meaning that as long as you’re making your payments, your insurance won’t expire.
  •   The death benefit is, in most cases, not taxable.
  •   Depending on the specific policy, it can accrue cash value over your lifetime or offer an investment component.
  •   Some types of  permanent life insurance policies allow you to borrow against your plan while you’re still alive.
  •   It is much more expensive: permanent life plans can cost up to 15 times more than a typical term life plan.

Permanent life plans are often more sophisticated than term life plans, and eliminate the risk of outliving your policy. When you go for permanent life insurance, you’re making a very big commitment, both in terms of time and money. And as a result, permanent life insurance policies often come with more bells and whistles than that of term life.

Permanent life is where insurance gets a little more complicated. Because it’s not just a simple death benefit that gets paid out like with term life plans, you have more options to choose from. Some people will want to use their permanent life plan for estate planning. Others will want a guaranteed benefit that does not decrease over time.

 

Term vs. Permanent Life – Which One Is Best For You?

While each policy has its own perks and advantages over the other, there isn’t a clear “better” choice between term and permanent. It all depends on your current situation and what you need out of your insurance.

Older people who get life insurance are often trying to cover their end-of-life expenses (like funeral costs). But if you’re a young parent, you have more than just a funeral to worry about. You have your children to take care of, but also your own parents who are starting to get older. Looking to protect your family’s finances as a whole is something you’re serious about. The kind of coverage you’re seeking might need to be bigger than just burial costs.

The advantage of a term life plan would be that it’s cheaper, and you can set your term to end around when you expect your children to be financially independent themselves. This way, you won’t have to worry about anything happening to them if you suddenly passed away. This will grant you peace of mind, but once your term ends, your protection will disappear.

On the other hand, a permanent life policy would set you up for life, and you’d be able to use your plan as a means to invest in your children’s future if you ever need the extra cash. The downside is obviously the higher price tag. But if the added benefits and the permanent coverage are worth it, then it may just be justified for you.

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Understanding Riders and Add-Ons: AD&D and CI

In addition to your basic plan, you have the option of adding riders (also called add-ons) to your life insurance. Riders are specific features that are tacked onto your life insurance for an additional cost, but cheaper than they’d otherwise be in a standalone policy by itself

To get a better idea of what riders are and why you should know about them, let’s look at a couple examples. The most common types of riders are Accidental Death and Dismemberment (AD&D), and Critical Illness Insurance (CI).

Accidental Death and Dismembered is an insurance that will give you a lump sum of cash if you suffer an accidental death or a dismemberment. AD&D is usually most applicable to those working in physical jobs where a there is more physical risk, or in professions where a disability or dismemberment would impect future earning potential.

Critical Illness Insurance serves to add additional coverage in the event you are diagnosed with one of 24 critical illnesses such as stroke, heart attack, or cancer. Surviving a critical illness can be expensive. Factoring in loss of income, requiring a caretaker, medications and treatments, transportation, and accessibility modifications, many survivors of critical illness often find that government and employer-funded support systems aren’t nearly enough. . That’s why CI is designed to help cover these sudden and steep expenses that aren’t always covered by traditional health insurance, as well as act as income replacement.

Some providers are more stringent on which types of critical illnesses are covered under Critical Illness Insurance.

 

Conclusion: Going Beyond Learning the Basics of Life Insurance

We hope you found learning the basics of life insurance simple and refreshing! By now, you should have a better sense of what life insurance is, the different purposes it can serve, and a few of the options available to you.

But remember that this was just Life Insurance 101. We covered the basics, but this isn’t all there is to insurance. If you want to learn more, there are a few things you can do to dig deeper.

To compare and get a feel of the different insurance products available to you, you can visit our Products page here.

But don’t think it’s all up to you to learn about life insurance. The best way to be sure you’re getting the right information is to talk to an expert. They live and breathe life insurance, and just talking to them will help you get a good idea of what plans would be best for you. You can get a quick quote and get in touch with our own team of experts after filling out a quick form here!

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