There are many types of life insurance available, but they all fall into one of three categories: term life, universal life or whole life. Each can be used for different purposes throughout your lifetime and depending on your financial situation.
Term insurance is typically used to cover short term needs such as a mortgage or other debt, or to cover the period when the family is young. You can purchase 5, 10, 20 or 30 year term insurance – in each case the coverage lasts for that period of time and you will have the option to renew it at the end of the term at a higher price. You might also have the option to convert the term insurance to a universal or whole life plan during the term. Term to 100 is also available with premiums and coverage guaranteed to age 100. The other term insurance plans typically terminate at age 80 or 85.
Universal life is relatively new in the Canadian marketplace and has become quite popular. It allows you to increase the amount of premium you pay in order to also “invest” within the contract on a tax-preferred basis. Part of your premium is used to pay for the life insurance coverage while the rest of the premium is invested inside the contract in a variety of investment options.
This option, while often more expensive, offers many benefits: premiums and coverage are guaranteed for life; limited payment periods are available; cash growth is tax-preferred, and; the internal cash values are guaranteed.
When you buy whole life insurance, you are also participating in the success of the insurance company you are dealing with. This means that you will receive a dividend from them each year. And, once the dividend and cash values are declared, they are guaranteed for life. Wealthy investors will often use this type of life insurance to tax shelter large amounts of their wealth.
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