Having adequate life insurance should be an important part of your financial planning. The
type(s) you choose will depend on your needs and goals.
Life insurance was established to provide funds at death to cover funeral and burial costs, pay
final expenses and debts, provide an income for dependents (especially those with dependent
children or a spouse), and leave a legacy for children and grandchildren. In addition, it provides
a means for tax-efficient savings.
Before we can explore the benefits of life insurance in more detail, it is necessary to first
understand the main types of policies and how they work.
There are primarily two kinds of life insurance and you could have them for different reasons.
You may find that a combination of the two is the best solution for your situation.

TERM LIFE INSURANCE
Term insurance provides coverage for a set term which can either be based on a number of
years, such as one, five, ten or twenty years, or based on your age when the contract expires,
such as when you turn 60.
The premium you pay stays the same for the duration of the contract. The sum insured is only
payable if you die while the contract is in force. If you survive to the end of the period, the policy
is then worthless.
At the end of the selected term, you can renew the contract for the same term without having to
prove that you are still insurable. It gets more expensive as you get older. The premium will
increase and will be calculated based on your age at the time of renewal. This increase can
become expensive in later years. You may find the cost unaffordable as you get older. Also,
some term policies are not renewable after a certain age.
Because you are buying a short term insurance policy, the cost is lower than permanent life
insurance. It is something to consider if you want to protect your spouse and children at a low
cost should something happen to you.
You may also consider purchasing it as an alternative to mortgage insurance. When you
purchase mortgage insurance, the benefit decreases over time as your mortgage gets paid off.
With term life insurance, the benefit remains the same until the term expires.
You may convert your term life insurance policy into a permanent life insurance policy at any
time. Depending on the conversion options, the ability to convert to permanent life insurance
without providing proof of health can expire as early as age 65 or 70. The premium will be
calculated based on your age at the time of conversion.

PERMANENT LIFE INSURANCE
Permanent life insurance provides protection for your life, not just for a specific term.
If your mortgage is paid off and your kids have grown up, you may wonder why you need
permanent life insurance since you have no dependents. You may want to consider it because,
in addition to paying a death benefit to your beneficiary, there is also a cash value:
1. The cash values inside of your policy can be accessed to supplement your retirement
income through a policy loan, partial surrender or loan strategy, if needed.
2. Any money invested inside a permanent life insurance policy grows on a tax-deferred
basis, within certain regulatory limits. This is especially attractive if you have maximized
both your RRSP and Tax-Free Savings Account (TFSA) contributions.
3. The cash values can be used to pay your estate taxes when you die so your
beneficiaries won’t have to pay the taxes on their inheritance. Keep in mind that life
insurance proceeds in provinces other than Quebec avoid probate and estate taxes if
they are made payable to a named beneficiary and not to your estate.
There are two kinds of permanent life insurance:

1. Whole life insurance policies have level and fixed premiums, usually payable for your
entire lifetime, which can’t be increased or decreased. The premium payments in the
early years exceed the amount required so you basically are overpaying in the early
years to subsidise your later years. You have no investment decisions to make as you
are provided with guaranteed cash values.
There are two kinds of whole life insurance policies:
a. Participating policies – you participate in the insurance company’s profits and the
plan pays out a dividend which can provide an increasing cash value and death
benefit
b. Non-participating policies – these policies are lower in cost and don’t pay out a
dividend
2. Universal life insurance policies offer flexible premiums, a choice of level or increasing
death benefits, and the ability to take premium holidays if you want to stop paying your
premiums in the later years.
When a premium is paid, the money is deposited into an investment account, which you
have investment control over. As such, you can end up with a significant portfolio
depending on the investment decisions you make. The cost of your life insurance and
administration are deducted from the investment account.