Life insurance jargon
If you have even bought insurance of any kind, you know it can be confusing. It is no different for life insurance, but here is a simplification for life insurance.
Generally, there are two types of life insurance, term or permanent. The name says it all. The term is payable for a period of time or term. Permanent is that it will always be there for you. Some compare the two to renting or buying. They both have their pros and cons, but it is all for what you need it for today and more importantly, in the future.
First, term life insurance has a renewal option. In every set number of years, it renews at a higher price. Typical term rates are yearly term or for five years, ten years, twenty years, to age 65 or age 100. The number of years describes the term rate or price you pay. It usually doesn’t affect the amount of coverage, only the rate you pay. So you can select your terms based on how long you want the coverage.
Permanent life insurance has several types such as universal life, whole life, participating, non participating, dividend reinvestment, etc, etc.
To keep it simple, decide on the amount of coverage you will need today and in the future as the primary goal.
The secondary goal is how much you want to invest or deposit into a plan for future use. Just like RRSPs while the money grows inside most permanent plans, you do not pay tax on the growth of interest on your money each year. Only in the future, you will pay tax.
Today’s life insurance companies design policies for consumer’s needs. One will be to pay tax on an estate of a holder of a large RRSP or RRIF account. Other policies are designed for tax shelters for business owners or professionals.
Then there are policies designed to maximize an estate for a spouse or family in the future and give more retirement income today.
Because of the complex retirement planning needs of Canadians, life insurance can be an effective planning tool once you get past the jargon.