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Life insurance is a contract to ensure that those who rely on you for financial support — such as a spouse or children — will receive money upon your death to help them pay for their needs.
That contract, called a life insurance policy, is made with an insurance company for a chosen amount of coverage that will be paid out, tax free, when the policy holder dies. The policy holder must pay a monthly fee, called a premium, to the insurance company for as long as the policy is in place.
The two main types of life insurance in Canada are term insurance and permanent insurance. As the names imply, term insurance covers the policy holder for a given period only, while permanent insurance covers the policy holder for life. There are a few options within each category, as explained below.
A term insurance policy can cover an individual for a specific number of years (say, 10, 15 or 20) or until a given age (e.g., 65). If the policy holder has kept up with the premium payments and dies within that term, the insurance company will pay out the lump sum death benefit. If, however, the policy holder reaches the end of the term, the coverage ends and no payment will be made when he or she eventually dies, unless the policy is renewed for another term.
Permanent insurance provides coverage for life and the premiums are fixed — they do not increase as you age — but are higher than for term insurance. These higher fees make sense considering a lump-sum death benefit payout is guaranteed at some point in the future (so long as the premiums continue to be paid), since everyone dies eventually. This type of insurance is often used for estate planning purposes, to leave children or other beneficiaries a tax-free inheritance.
Before deciding whether to purchase life insurance, see if you already have coverage as part of your employer’s group benefits plan. Usually such coverage is based on your annual salary — for example, the death benefit could be specified as 1x, 2x or 3x your annual salary.
If you think that amount is sufficient to cover all funeral and estate fees when you die, and you don’t have any dependents, then you likely don’t need life insurance. If, on the other hand, you don’t have any coverage from work, or you don’t think that the coverage you have will be enough to provide for your family when you die, a term life insurance policy could make a huge difference in the financial futures of those you leave behind.
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