Life insurance
Life insurance
Life insurance pays a lump sum to the people you name. Everything else about it — the type, the length, the price — follows from two questions: how long the money would be needed, and how much.
Worth knowing: Term and permanent answer different questions.
Term: cover for a period
A term policy covers a set number of years, commonly ten or twenty, for a premium fixed over that term. It suits an obligation with an end date, which is why it is usually sized around a mortgage and the years children are dependent.
The part people are caught by is renewal. Most term policies renew without new medical questions, which is valuable if your health has changed, but the premium at renewal is based on your age then, not your age now. Renewal pricing is set out in the contract at the time you buy, so it can be read years before it matters.
Permanent: cover for life
Whole life and universal life stay in force for life as long as the premiums are paid, and usually build a cash value over time. They cost considerably more than term for the same amount of cover, because the payout is a question of when rather than if.
They are generally used where the need does not end: final expenses, a tax bill triggered at death, leaving something behind deliberately, or a business arrangement. Whole life is the more fixed of the two; universal life separates the cost of insurance from an investment component, which gives flexibility and puts more of the outcome on the choices inside it.
What decides the amount
The common approach is to add up what would have to be paid or replaced — the mortgage, other debts, years of income, childcare, education — and subtract what already exists, including savings and any workplace cover.
Group cover through an employer is the part most often double-counted. It is usually a multiple of salary and usually ends when the job does, so it is generally treated as a layer that might disappear rather than as a permanent part of the total.
What decides the price
Age and health at the time of application, whether you smoke, the amount, the length of the term, and in some cases occupation or travel. Applications usually involve health questions, and often a medical.
Premiums are quoted on the information given and confirmed after underwriting. A policy issued at a different rating than quoted can be declined at that point without obligation.
Questions people ask
Is the payout taxed?
In Canada the death benefit from a personally owned life insurance policy is generally received tax-free by the named beneficiary. Policies owned by a corporation follow different rules.
What happens if I stop paying?
A term policy lapses and the cover ends, usually after a short grace period. A permanent policy with cash value may have options to keep some cover in force, which are set out in the contract.
Can I be turned down?
Yes. Insurers can decline, or offer cover at a higher price, based on health, history and other factors. That possibility is also why cover bought earlier, when health is simpler, tends to be cheaper.