The Different Kinds of Life Insurance Policies

Life Insurance (Term, Whole Life, Universal Life & Child Insurance)

Life Insurance pays cash to your family or other beneficiary after your death. This will provide them with needed income and final costs. With policies like Whole Life and Universal Life; you can build up cash values (which you can borrow from or use as an investment, guaranteed).  If you’re budget conscious and want to protect your assets and family, Term Life Insurance might be your solution.  Almost any budget can afford a life insurance policy – we all know something is better than nothing. Thinking about insuring your children? When it comes to insuring your children, Child Life Insurance policies actually give your children a great financial leg up for their future with their built-up cash-values.

Term Insurance

Term Insurance Is insurance that you use for coverage for a period of time. Term Insurance is the low-cost option. This product provides you with a set death benefit for a set amount of time (10 years, 20 years, etc.). When that time’s up, your coverage is renewed at a higher cost if you don’t cancel your coverage. You can also convert it to a permanent life insurance policy without having to answer questions about your health.

Term Insurance with its lower initial cost compared to permanent life insurance, is a popular way for those just starting out to protect themselves and their families. Term life insurance is usually less expensive than permanent life insurance, so you may be able to purchase more coverage. You may even want to consider a mix of a little permanent with some term insurance.

Here are some examples of why someone might get a Term Insurance policy. When someone gets a term policy, they want that insurance for the term selected. A parent might get a term policy that covers their children while they would need more coverage, probably up to age 20 or so, by then their children should be okay on their own if something were to happen to you as they are no longer dependants. Another example of why someone would purchase Term Insurance is for the term of their mortgage (see below for the difference between Mortgage Insurance from the bank and Term Life Insurance).

Whole Life Insurance 

Insurance that lasts from now until the day you pass away is called permanent insurance, and it comes in many different forms. One of the oldest and most successful is called Whole Life. You can likely guess why it’s called that (because it covers you for your Whole Life).

Whole life policies are considerably more expensive than your typical term policy. Generally, there are two ideal use cases for a whole life policy. The first is to maximize the estate that you leave your loved ones. Participating Whole life policies tend to return very favourable rates of return over time, and the death benefit is received by your beneficiaries tax-free, resulting in a very effective way of building a legacy for the next generation.

The other case is for building up value to be used during your life. By using a form of the product that builds early cash values, you’re able to borrow against the value in your policy to fund education, retirement, or any other lifetime need. When you pass away your tax-free death benefit can be used to repay any remaining debt.

Universal Life Insurance 

Like Whole Life, Universal life insurance  is permanent, meaning it lasts the rest of your life – as long as you pay the premiums. Universal life insurance combines the advantages of a permanent, lifelong policy with a tax-advantaged investment component.

So, what may make universal life insurance right for you? The short answer: flexibility. This kind of insurance typically lets you select your preferred premium schedule, the amount you want to pay (within limits) and an investment mix that matches your unique risk profile.

Insurance for Your Children

No one wants to go through the death of a child but for the benefit of the child, everyone should consider child insurance. There are two ways to do it; a child rider or a stand-alone policy, both with their own benefits to consider.

Child Term Rider 

Any family that has a child should at the minimum have a Child Rider including each child. It is the cheapest and easiest child insurance, you just add it to a Whole Life or to a Term policy. You can get up to $25,000 (max) per child. Whatever you buy in a rider, it’s each. Typically $10,000 per child is what people get, which typically costs about $3 in premiums total for all the kids per month, each child gets covered for that $3 face amount. Having said that, you do have to provide details of your kids, because not all kids may be covered, since major issue like cerebral palsy is probably not be covered. You will be asked questions like age, height, premature at birth, etc. Every time you have another child you can’t assume they are covered – you must notify the insurance company of the child, with their height, weight, etc. (but it does not change the premium monthly cost for all the children).

The children’s coverage lasts until age 21, maybe to age 25 if they are at home in post-secondary. At age 21 you will be notified by the company that you can exchange/convert the Child Rider with permanent insurance, with no medical where you can get up to 5x what they were initially covered for and that is with no medical guaranteed at the cost of that age (21 years old).

Stand Alone Child Insurance 

There are many benefits of a Stand Alone Child Insurance policy. First of all, later on, it ends up being cheaper, you also get limited pay options which you don’t get on a Child Rider, you can have a policy paid up in 20 years, while the policy increases in value over time which is cheaper when getting the policy when one is younger.

You can get a policy with paid-up additions. When you buy an individual policy for your child, it is a Whole Life policy that creates dividends. Dividends are a profit the insurance company makes and then you get a profit which you can purchase more insurance with. Later in life, the child can take that insurance and borrow from their built-up cash values for whatever their needs are, retirement, or a down payment on a home, etc.

So the advantage of going with a stand alone policy is that it’s cheaper, has limited pay options, dividends, can buy more insurance, there is no maximum coverage with this type of policy. Plus you can add a guaranteed insurability benefit rider to your stand alone policy – which means starting at age 21 they will be offered to buy 10 times the face amount with no medical assessments. The offers happen every 3 years, there is an offer of 10,000 and then also included in the 10 is on your first Marriage and your first house (which you have to apply for). Every 3 years is  24, 27, 31, 37, 40, 43. And you will get one more (it’s 10 times). You don’t have to take the offer. If you don’t take the offer it will expire, and you can take the next one (or not).

Cash-Values are investments

Buying insurance for your children can give them a financial leg up in their future. As the policy grows and your premiums get paid year after year a cash-values portion gets built-up that your kids can borrow from, tax-free, and guaranteed. One can borrow up to 80% of the cash-values and does not have to pay back the full amount, they can choose just to pay the interest. If you don’t pay back the full amount it just comes out of what the death benefit would be. Your child can choose to use that money towards a down-payment on a home, towards a car, or maybe towards a business venture.

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