Life insurance is an investment that, at first glance, might seem unnecessary to someone in, say, their early 20s, 30s or 40s. But life insurance can actually be utilized as a really fantastic financial planning tool well before retirement, particularly for high-net-worth individuals and families.
While many might think that the only purpose of life insurance is to support dependents following the death of the insured, it can actually be utilized as a way to help to grow your wealth and diversify your savings during your working years.
Types of Life Insurance in Canada & How They Work
In Canada, there are two different types of life insurance – permanent life insurance and term life insurance. There are a whole host of sub-categories that fit under these two umbrellas, but these are the two main categories that anyone considering life insurance should know about.
Term Life Insurance
Term Life Insurance will cover a policyholder for a set term. So, if the insured individual dies within that set term, a tax-free lump sum death benefit will be paid to their family or dependents. If that term expires prior to the death of the insured, the policyholder can either renew for another set term, upgrade to permanent life insurance or terminate the policy.
Term life insurance policies are typically purchased in 10 or 20-year terms, and premiums will often increase upon each renewal. The benefits of term life insurance policies include affordability, flexibility and simplicity.
Permanent Life Insurance
Unlike term life insurance, permanent life insurance plans offer guaranteed lifetime coverage, and they have a cash value which grows over time. Under the umbrella of permanent life insurance, you have the option to select whole life insurance or universal life insurance.
Both can be used as quite a powerful investment tool to offset costs like medical expenses and be used to build savings. An added benefit is that while premiums are higher, they will not change over your lifetime.
Why Life Insurance Is An Effective Financial Planning Tool
Long-term financial planning for your family without life insurance is a bit like heading out on a wild adventure in the wilderness without any emergency supplies. You can be as well-intentioned as you like, but if anything goes awry, all of those wonderful plans of adventure you had will go out the window, and your family will be left scrambling.
Even as a young to middle-aged adult in the midst of your core earning years, life insurance offers a much-needed safety net to your family members in the event of unexpected death.
If your spouse, children or any other family member relies on your income to survive, then having adequate life insurance coverage in place is absolutely necessary.
Otherwise, your family’s plans for retirement, college, any other large-scale financial plans, or even their ability to stay in your home and cover regular household expenses may be jeopardized in the event of your death.
Term Vs. Permanent Life Insurance: Which One Is More Effective In The Financial Planning Process?
Knowing which insurance policy to select is challenging enough as it is, but when you try to take the financial planning aspect into consideration as well, it can feel a bit dizzying at times! Here is a basic breakdown to help simplify that process for you.
When considering term versus permanent life insurance as a financial planning tool, there is one thing to keep in mind: there is no one policy that is right for everyone. What makes sense for you might not make sense for your friend down the road, and vice versa.
Any professional you might work with will take your age, earnings, dependents and a number of other factors into consideration to help guide you in selecting the right policy for you and your family.
Term Life Insurance as a Financial Planning Tool
Many individual needs are adequately covered by a term life insurance policy. Having a term life insurance policy in place will ensure your loved ones will remain protected by the guaranteed death benefit. This, on its own, is an important and valuable financial planning tool for you and your family.
With that said, term life insurance does not equate to any sort of cash value other than the guaranteed death benefit. This is where, for some, permanent life insurance becomes a more viable option.
Permanent Life Insurance As a Financial Planning Tool
While permanent life insurance policy premiums are significantly higher than term life insurance, there is a good reason for it. Permanent life insurance not only offers guaranteed lifetime coverage as long as premiums are paid, but they also have a cash value that you can borrow against and utilize throughout your lifetime.
Whole and universal life insurance policies (both variations of permanent life insurance) can be strategically harnessed after a set period (typically 10 years) to offset the cost of or pay for unexpected medical bills, college tuition, or other significant household costs like a much-needed home renovation.
These policies also get more valuable over time as you pay into them, so for, say, a millennial who is less likely to have a pension to lean on than their parent’s generation was, it can be a really worthwhile investment.
Permanent life insurance policies can also be harnessed to diversify your portfolio as their value isn’t affected by market volatility in the same way that stocks or bonds are.
Not Sure Which Policy Is Right For You? Get A Quote or Talk to An Expert
Start building your wealth and go to sleep knowing your family will be protected while you are here and when you’re not. As a fully digital life insurance provider, the experts at Easy Insured can compare quotes from reputable insurers across Canada and help you select the right policy for you and your family. Get a no-obligation quote today!