Think you don't need life insurance? Think again. Regardless of your age and circumstances, people you care about could find themselves in financial difficulty if you die. Life insurance can protect them.
However, you may not want to buy insurance that covers the rest of your life. So why not opt for a more flexible option: term life insurance. Here's what you need to know about it.
Why take out life insurance? What's the point?
Life insurance, no matter what type, represents financial protection not for yourself, but for your family, loved ones and beneficiaries. It aims to guarantee these individuals a certain security if you die suddenly.
In the event of your death, such individuals will have the right to financial compensation, which will allow them to repay your debts, compensate for the loss of income resulting from your departure or to use the money for any other purpose.
There are two main types of life insurance: permanent life insurance (sometimes referred to as "whole life insurance") and term life insurance. To select the right cover for you, you must first assess your needs and learn what differentiates them.
Term vs permanent life insurance: what's the difference?
Permanent life insurance is used to protect your beneficiaries throughout your life. Once taken out, it remains valid until your death, with no age or time limit. The amount of coverage can thus be used to pay funeral expenses or to leave an inheritance to your successors.
Term life insurance, on the other hand, offers much more limited protection over time. This type of insurance only remains valid for a predetermined period (usually 10 to 30 years) and may also end when the insured reaches a certain age. It meets specific needs in the short or medium term.
Unlike permanent insurance, term life insurance is generally used to avoid leaving behind a heavy financial burden, whether this be student debt or a mortgage. It may also be an attractive alternative to mortgage life insurance.
The two types of insurance also differ regarding the ability to borrow funds. Indeed, it is sometimes possible to withdraw a certain amount if necessary or even to redeem the value of the insurance. This option, which is only permissible with permanent life insurance, does come with its fair share of drawbacks that will need to be taken into consideration before moving forward.
Whether you want to take out permanent or term life insurance, there are many insurance products available from various companies tailor your coverage to your needs.
Characteristics of term life insurance
The choice over whether to take out term or permanent life insurance is certainly a personal one. It will depend on your needs, your current projects and your objectives. However, here are some reasons why you might opt for term life insurance.
As mentioned earlier, term life insurance offers a benefit for a restricted time. Its purpose is to meet short or medium-term needs. It can thus be used to protect the standard of living of children, pay off debts (such as mortgage payment debt) and even protect business owners and shareholders in the event of sudden death.
One advantage to this type of insurance is that its cost is both low and fixed. It is therefore usually more affordable than permanent life insurance. It also offers more flexible protection.
Should you wish, term life insurance may be renewed at the end of the initial term. However, you should know that the cost is then readjusted for this new period, generally increasing due to your older age and other various factors.
This category of insurance also offers the possibility of being converted into permanent life insurance at the end of the fixed term. You will be required to provide new medical information to confirm your health status. While this conversion may lead, once again, to an increase in price, it will not affect the amount of the death benefit (amount paid upon your death).
Here are some examples of situations where term life insurance might be a good option:
- You want to protect your loved ones in the event of an important financial undertaking (e.g.: buying a house with a mortgage);
- You want a flexible life insurance product that you can adapt to your needs over the years;
- You want affordable protection so you can invest your money in other areas;
- You want the option of renewing your insurance or converting it into permanent life insurance.
Table comparing term and permanent life insurance
To help you understand the differences between term life insurance and permanent life insurance, here is a summary table of their characteristics:
|
|
Term Life Insurance |
Permanent Life Insurance |
|
Level of protection |
Temporary financial protection (fixed term) in the event of death. |
Financial protection for life until death. |
|
Who is it for? |
Homeowners with a mortgage. Individuals wishing to protect their loved ones in the short or medium term. |
Mainly adults who seek long-term protection and want to leave a legacy when they die. |
|
Why do I need it? |
Short- or medium-term needs such as: protecting the standard of living of children; ensuring debts are repaid; covering mortgage repayments. |
Long-term needs such as: paying for funeral expenses; covering taxes payable after death; leaving behind an inheritance for your beneficiaries. |
|
Cost |
Low and fixed cost during the fixed period. The cost increases if the contract is renewed after the initial period. |
Fixed cost for the duration of the contract. The cost tends to be more expensive than term life insurance. |
|
Renewal |
Yes, this insurance can be renewed at the end of the fixed period. |
No, this insurance cannot be renewed as it remains in place until your death. You do not need to renew it. |
|
Conversion privilege |
Yes, term life insurance coverage can be converted into permanent life insurance. |
No, since this form of coverage is permanent. |
|
Cash Surrender Value |
No cash surrender value. |
There is the possibility of borrowing against cash surrender value. |
Before you take out term life insurance, make sure that it is the best solution for you. Don't hesitate to ask your financial planner or advisor for advice. You can also use a broker to compare the different insurance products available and find the one that suits you best.
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