Types of Life Insurance in Canada – On this site, we have previously described insurance as a legal paper offering a kind of protection from financial loss. It is a form of risk management policy, and its major function is to hedge against the risk or the possible risk of losing something vital to the wellbeing of a person. An entity or body which provides insurance cover is known as an insurer, such can be an insurance company, or underwriter or the state. It is also alternatively described as an arrangement by which an insurer or the state pledges to provide monetary compensation for a specified loss of property, damage, illness, or death in return for receiving a specified fee called a premium.
Life insurance has two major or important attributes – the premium and then the death benefit. If we strip away the marketing aspects (such as names and brands) from life insurance those are the two major attributes that we are left with, and which basically define Life Insurance. If we die, how much do our family (beneficiaries) receive from the insurer? And how much does it cost us (do we pay to the insurer) to get them to receive those benefits?
In this article, we look at the types of Life Insurance that is available in Canada. But first, there are a few technicalities that we must clear up. Read them immediately below.
Types of Life Insurance in Canada
- Premium Life Insurance
- Death Benefit
- Term Life Insurance
- Permanent Life Insurance
- Whole Life Insurance
- Term to 100
- Universal Life Insurance
Premium Life Insurance
The Premium is the fee we pay for the insurance policy. It’s the premium that basically differentiates the various types of life insurance available in Canada. All insurance types attract payment of a premium so How are the premiums different?
Life insurance premiums, like all forms of insurance, are based on the concept of risk. Higher risk usually means higher or more frequent claims and that naturally dictates higher premiums. An example is car insurance. Drivers that have a history of getting into accidents tend to be poorer risks and that usually leads to higher insurance premiums. But now we are talking about life insurance. So what makes a poorer risk with life insurance plans?
For most of us, it’s our age. Younger people generally don’t die as often as older people. Claims are less likely, and so costs – and therefore premiums are much lower. Larger numbers of people tend to die as they age or fall into a certain age bracket, so therefore costs are higher. This is intuitive for most of us (we naturally expect it) – life insurance is cheaper when we’re younger and it usually gets more expensive as we grow older.
If the insurance company were to calculate and then charge us the direct cost of insurance based on a correlation with our age then, our premiums would go up every year.
This type of life insurance, in which the costs are directly charged by age, is called a one-year term life insurance plan, It’s a life insurance. The policy holder pays a Premium and if he dies, his family members or other nominated beneficiaries get the benefits. It’s specifically “one-year” term life insurance plan because the policy expires after a year, and then a new agreement is calculated based on your age. The premiums, therefore, increase every year. This is just a technicality though, in reality, the premiums are pre-calculated over an extended time and just increase yearly.
Now Let’s look at the death benefits. If a man has $100,000 of one type of life insurance and another man has $100,000 of another type of life insurance and then both of them die, how much do their families or beneficiaries receive? In both cases, the families each receive $100,000. The beneficiaries can’t tell what type of insurance their benefactors had! The point here is that the death benefit is death benefit no matter the name or brand of insurance It remains the same for all the various types of life insurance.
So Now what are the types of Insurance that are available in Canada? Let’s read below:
1. Term Life Insurance
Term Life Insurance, this type of life insurance has 3 major Sub-types: 10-year term, 20-year term, 30-year term
Because one-year term insurance isn’t a very popular product (due to the constant premium increases) the insurance companies broaden out these premium costs over periods of time called ‘terms’. Now rather than charging you the increasing premiums fees every year, they charge you what they calculate as the average premium over that 5-year term. You then pay the same total monthly premium costs, but now your premiums are the same for 5 years. At the end of those 5 years, your premiums usually increase and the company charges you the average premium over the next 5 years as another term. This is called a 5-year term life insurance.
If the company decides to take those underlying costs that increase every year and averages them out over 10 years (so that your premiums are level for 10 years), that product is called 10-year term insurance.
That is how term life insurance works. Companies package 5 years, 10-year term insurance, 20-year term insurance and also 30-year term insurance policies. These are all common life insurance products in the Canadian market today.
2. Permanent Life Insurance
Permanent Life Insurance is the second of two major types of life insurance, and it also has 3 major Sub-types:
Universal Life Insurance, Whole Life Insurance, and Term to 100.
As we explained in the first half of this article what differentiates life insurance types is the premiums – and more specifically, how those premiums fees are paid over time. The underlying cost of all life insurance products goes up as we get older. Term life insurance ease that process out by steadying our premiums over periods of time called ‘terms’.
In Permanent Life Insurance, however, they take the costs and then average them out over an even longer period of time- for life. Let’s say the insurance provider averages your costs of insurance (that go up every year) over your entire lifetime. That way we see premiums that are level for life. And that’s the major definition of permanent insurance – paying level premiums fees for life.
3. Whole Life Insurance
Whole life insurance is a kind of life insurance that features premiums that far exceed the actual cost of the insurance policy– that means the company is taking in premium fees higher than they need. As we grow older, the costs of life insurance on a yearly basis will usually exceed the premiums fees you would usually be paying with permanent life insurance.
In the early years of your insurance policy, you’ll notice that the premiums fees are actually far higher than the company’s operating costs. Unlike most products that we buy, life insurance companies don’t take that additional premium fees and add it to their annual profit – they don’t spend it. Instead, they take that excess premium they make and save it up (they call it ‘reserving’) inside your policy. These excess premiums that you pay in the early years then build up inside your policy. In the later years, when the operating costs now exceed your premiums, those reserved monies are then used to handle the additional costs of the life insurance. In other words, you pay more now in order to pay less later.
Now if for any reason you decide to cancel your policy, the insurance company will actually refund you a percentage of that money in reserve. They do so because they no longer need it to pay the future costs (there are no future costs since you just canceled your life insurance policy) so they give some of the cash back to you. This return of your overpayment of premium fees is called a cash surrender value or sometimes cash value.
4. Term to 100
Whole life insurance has been useful in keeping life insurance premiums level for life but there has been some discord over how it was being marketed to the end consumers. The discord centered around the way that cash values were being done. Apparently, some customers did not like the refunds they got.
So in response insurance companies offered a permanent life insurance product where they had annulled all cash values. This allowed them to reduce premium fees below whole life insurance plans. This is called Term to 100 and is basically a Whole Life Insurance with level premiums for life but no cash values.
5. Universal Life Insurance
This kind of insurance plan has two sides to it. The first characteristic is a well-defined insurance policy, basically identical to a Term to 100 insurance policy. The premiums and the death benefit for this part of the policy are usually specified by the insurance company. The second side of this insurance policy is an investment account that comes with it. Any premiums fees that you pay above the insurance costs are placed into this investment account. The amount of these premiums are negotiable and defined by you. They can sometimes be as low as $0 (that means you can pay the ‘minimum premium’ of just the insurance cost alone) or you can increase the fees of your total premium in order to start making contributions into the investment part of the policy.
By contributing to the investment side you would usually expect those investments to increase and grow with time. However universal life insurance investments are usually not guaranteed to yield profits. Those investments can in-fact decrease.
That’s all about Types of Life Insurance in Canada.
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