Retirement Planning Vancouver | Basics Of Life Insurance Canada
The first question you are probably asking right now is, why do I need life insurance? Even if you do not know all the reasons why you should have it, keep reading more to find out how it can help you and your loved ones. It is a risk management policy that is like a gift to those you leave behind once you pass away. This insurance helps to cover funeral costs, tax bills or any debts you may still owe.
There may even be some money left over to help with other financial burdens your family may have. There is a predetermined amount of money that is guaranteed to whomever you name. This is what used to be known as a death benefit since it was a sum of money paid upon death.
Learn The Terminology of Life Insurance
It is a suitable time to go over some of the terminology around life insurance. A policy is an agreement you have with the insurance company. You are the policy holder because you are the one making payments to it. You can even have policies in place for your loved ones. You are the one making payments which are referred to as premiums.
These premiums can occur monthly, quarterly, semi-annually, or annually. You can decide who the payout will go to and this is called a beneficiary. You can have one person named or multiple people. In fact, you can have it go to a charity, company or into a trusted fund. An added bonus in Canada allows the beneficiary to not be taxed on the life insurance payout.
The Major Types of Insurance
There are two major types of insurance, term and permanent. Term insurance is one that is only set for a certain amount of time. It is usually held for ten to thirty years and when you start young your premiums are less expensive. It is about the price of a pizza per month. If you sign up later the premiums will be higher since it is based on your level of health and age.
The healthier and younger you are the lower the premium. The main thing to understand about this type of insurance is that it eventually expires and if you were to take out another in its place later you will find the premiums will be much more costly due to your age increasing or your health deteriorating. The beauty of a term insurance policy is that later on it can be easily converted to a permanent insurance policy.
The insurance company has an obligation to convert it without asking for updated information. This is a great option if you need the insurance for longer than you expected or initially wanted. Term insurance is a fantastic way to get started with having life insurance. If you feel you need it to cover any bills or liabilities no matter what the age, your beneficiaries will not have to worry about finances upon your death whether it is a premature death or later in life.
Insurance Never Expires
Permanent insurance does not expire. It provides coverage until you pass away and not just for a set period of time like term insurance. The premiums are locked in and will cost you about the same as ten large pizzas per month which as you can see is higher than term insurance. There are two main types of permanent insurance. There is whole life and universal life. Whole life uses the premiums paid to cover the original payout as well as invest.
Typically, the investments chosen are minimal risk and moderate growth. With this type of insurance, you can choose between a participating policy or not. If you choose the participating policy you share the profits earned within the policy. These profits also known as dividends can be used towards the premiums or used to boost the death benefit. In summary you can get the cash value plus the payout if the policy is structured properly. This cash value will never go down.
What is Universal Life Insurance
Universal life insurance works in a comparable manner with some key differences. The main one being that there is more freedom in how the policy is structured as it is more like an investment with a life insurance component to it. You can invest as much or as little as you want. You have regular premiums, but the rest is up to you in how you invest it. That part is not locked in.
Change your premium as you see fit
The other important thing is you can decrease or increase the premium as you see fit. Smart wealthy Canadians use this type of policy because of its tax shelter qualities. If they have maxed out their TFSAs or RRSPs this is a next smart step to sheltering their investments from taxes.
Are you now asking how much coverage is enough? You would not be alone in that. Many Canadians ask this same question early on in their research about life insurance. The coverage amount that is generally safe is anywhere from seven to ten times your annual salary. For example, if you make one hundred thousand per year you will want to have one million in coverage.
From this point you will want to explore which features you want to have in the policy and determine your budget. Do you want a whole or term policy or maybe a hybrid? These are some of the first questions to answer. As a rule of thumb all your premiums for insurance should be no more than ten percent of your income.
If you are still unsure on any of the information shared, you can call Thomas Chan to book a free consultation. He will explain things to you and help you get started on the smart road to investing and setting up life insurance so not only you can be at peace with your financial future, but your loved ones will be taken care of as well. You can visit thomascchan.com for more information or call 1-604-877-4211 to book today.