Life insurance is a contract under which the insurance company agrees to pay, upon the death of the insured person, a lump sum of money to a beneficiary chosen by the policyholder in exchange for a premium. This lump sum will be paid in full to the beneficiary, tax free.
The importance of life insurance
Life insurance is a great way to ensure that families enjoy the same standard of living following the death of the insured person. What does it do?
Protects the assets of the estate.
Creates a legacy.
Covers funeral, notary and liquidator expenses.
Pays estate taxes.
Provides for the education of surviving children.
Settles debts and loans.
Complements the life insurance offered by your employer.
Three types of life insurance are available, depending on your needs.
Term life insurance
This type of insurance provides protection for a limited period, freeing the policyholder from certain temporary financial obligations over 5, 10 or 20 years. These policies are called T5, T10 and T20 insurance, with the “T” meaning “temporary.” Term life insurance is generally renewable, with premiums increasing from term to term.
Wholelife (Whole life) or permanent life insurance
This type of insurance permanently protects your family and your assets, even if your health deteriorates. The policy continues until your death and is designed for people who want to leave a legacy. Premiums are usually fixed, and with certain policies, they are payable only for a number of years, for example 10 or 15 years.
Insurance policies that cover permanent needs generally include a cash surrender value. The cash surrender value is the amount you get when you cancel your insurance and generally has tax implications. Sometimes, it is possible to borrow against this surrender value. Beware! If you fail to keep up with loan and interest repayments, you could lose your insurance policy.
Universal life insurance
This policy combines insurance and investment. You pay premiums that are greater than the cost of your insurance, and the surplus is deposited in a capitalization fund that remains tax-free so long as you do not withdraw the money. You can then choose from a range of investments, such as segregated funds, or pay your insurance premiums. With this type of life insurance, you are not required to pay a premium every year. However, you still need to ensure that there is enough money in the fund to cover your premiums.