Area of Law: Insurance Law
Answer # 2730
Life insuranceRegion: Ontario Answer # 2730
Life insurance allows you to provide your dependents and loved ones with financial protection and support after your death. It can also help to cover the costs of funeral expenses, capital gains taxes, loan repayments or other obligations arising at death. The insurance proceeds are paid, usually in a lump-sum, to the person or group of people you have chosen to receive the benefits; these people are called beneficiaries. If you have not chosen a beneficiary, the proceeds of the insurance policy will go to your estate. The amount paid is almost always tax free, and is not subject to probate fees if paid to a beneficiary.
When you buy life insurance, you are usually required to make monthly payments called premiums. Premiums are paid throughout a person’s lifetime or for a specified period, depending on the type of insurance policy.
Do I need life insurance and if so, how much?
How much life insurance you require, or if you require any at all, depends on your personal situation. When evaluating whether you should buy life insurance, you can consider several things, such as:
- Do you have dependants and wish them to be financially secure if you were to die? As a general rule, you may want to leave your dependents enough money to cover specific expenses and maintain their current lifestyle. Your dependents should be left with enough money to pay off your debts and funeral expenses, and to pay for food, shelter, clothing and education costs, at least during the transition period.
- If you are a single parent, making or receiving support payments, how would these payments be kept up in the event of death?
- If you have a mortgage on your home, do you want it paid off in the event of your death?
- Are there charities to which you would like to leave money?
- What capital gains taxes or other financial obligations would arise at death?
- What other investments do you have that could be used to meet some of these needs?
What are the main sources of life insurance?
If you decide that you need life insurance, you need to know what the four main sources of life insurance are, and what types of life insurance you can choose from. You may find that you already have some group life insurance sponsored by your employer, union or association; or that you have monthly survivor benefits or the lump-sum death benefit paid under the Canada Pension Plan. Third, you may have creditor insurance which you purchased when you applied for a mortgage or loan.
In addition to these three sources of life insurance, you can purchase an individual policy directly from an agent or insurance company. Once you know what your source of insurance is, you will need to decide what type of policy is best for you.
Types of life insurance
While there are many variations, there are two main types of life insurance: term insurance and permanent insurance.
Term insurance is the simplest and least expensive kind of life insurance characterized by fixed premiums for a defined period or “term.” The amount of the policy is paid out to the beneficiary if you die during that period; if you survive the term, the policy expires. Term insurance is often sold in 1 year, 5 year, 10 year, or 20 year terms, and is often available in renewable and convertible forms. A renewable term insurance policy allows you to renew the insurance policy at the end of the term, at an increased cost, but without having to take a medical and prove your insurability. A convertible term insurance policy allows you to convert your policy into a cash-value type of policy without having to prove insurability.
It is best to buy term insurance that is both renewable and convertible, unless you are sure that your needs for insurance are temporary.
Permanent, whole life, or cash-value insurance. Permanent insurance provides protection as long as you live provided that you continue to pay the premiums. The premiums are usually a set amount so permanent insurance is more expensive than term insurance in the early years but less expensive in later years. The “cash value” that usually develops from the higher early premiums is given to you if you terminate the policy, or you can borrow it to meet your other financial needs. “Universal life” is a popular type of permanent insurance that typically provides you with some flexibility with the level of premium payments and some options for the investment of the cash value.
As a general rule, people purchase permanent insurance to cover the costs of funeral expenses, capital gains taxes and long-term needs of a disabled dependant; while temporary needs such as mortgage payments and education costs for dependants should be covered with term insurance.
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