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National Life Insurance Awareness Month: How Life Insurance Works

Wednesday, 6 September 2023

Our lives are filled with many occasions that are worth celebrating. Marrying the love of your life, moving into your forever home, welcoming a child into the world, or starting your own business are all common examples. These all provide you with a feeling of excitement and a sense of accomplishment - and for good reason. They signify the start of a new chapter in your life’s story. 

With that in mind, safeguarding these milestones is very important. Life is unpredictable and constantly changing, which is why ensuring you and your loved ones are protected from the unexpected is a necessary step. In honour of National Life Insurance Awareness Month, we’re going to dive into the different ways life insurance can provide you with peace of mind so you can keep on celebrating life’s biggest moments. 

What is life insurance?

Life insurance is a product that provides financial security to your beneficiaries in the event of your death. While this is a subject that many people try not to think about, it is not a topic that should be swept under the rug. By having a policy in place, your loved ones will receive a tax-free payment that can help pay for a variety of expenses. 

Examples include:

  • Funeral expenses
  • Mortgage payments
  • Pay off debts
  • Higher education costs

Life insurance can also act as a way to replace income so your beneficiaries can continue to pay for general living expenses and maintain their standard of living. Without this protection in place, covering these might not be possible, and place added stress on your family during an already difficult time. If this is the case for your situation, it is highly recommended you look into purchasing a policy.

What types of life insurance exist?

There are four main types of life insurance you should consider. These include Whole Life Insurance, Participating Life Insurance, Term Life Insurance, and Universal Life Insurance. 

Whole life insurance is a great option if you would like to secure lifetime coverage. A benefit of this option is that you typically pay fixed premiums over a predetermined length of time. This means you will not see an increase in your premiums, which is helpful when planning a budget. Once the end date of that term has been reached, you will stop making payments, but your policy will still be in force. This feature will allow your dependents to receive a death benefit when you pass away, regardless of your age, provided you pay your premiums. 

Another reason to consider whole life insurance is due to the fact that these policies have a cash value component that grows over time. A portion of your payments will go into this cash value, and the insurance provider will then invest it on your behalf. The cash value of the policy can be accessed through loans or withdrawals. Your beneficiaries will then be able to use the funds received to cover any upcoming expenses. Alternatively, you can also access the cash value of your policy and leverage it as collateral for a loan while you are still alive. Depending on how you choose to access this money, there will be some financial implications to consider, like tax and interest. 

Participating life insurance provides a nice mix of insurance coverage and an investment strategy. It provides policyholders with the benefits of whole life insurance, like permanent coverage, guaranteed premiums, and tax-friendly cash value accumulation, as well as the potential to earn dividends. These dividends are not always guaranteed but are typically paid out by profits earned by the insurance provider. The dividend rate can vary and will be influenced by factors such as the insurer’s financial performance and current market conditions. 

If your policy were to earn dividends, you could use the funds in the following ways:

  • To reduce your annual premium to make your policy more affordable
  • To receive the dividends as a cash payout
  • To purchase additional coverage that increases the death benefit and cash value
  • To repay policy loans or interest on loans that were taken against your policy’s cash value 

The option that best suits you will depend on your current situation and plans for the future. Don’t hesitate to contact a BIG broker if you are unsure which direction you should go.

Term life insurance is coverage that is limited to a specific amount of years. There are some key differences between term life and whole life insurance. Some pertain to the length of your policy, while others have more to do with the price of your premiums and other financial components. 

Perhaps the most important difference is the duration you are covered for. Your policy will be set for a specific amount of years. If you were to pass away during the time your policy is in force, your beneficiaries will receive a payout from the life insurance provider. That said, if you outlive your policy term and were to pass away, no death benefit will be received. Depending on your situation, you might choose to have a shorter term that ranges from 5 to 10 years. However, you might be starting a family and opt for a longer term that is over 20 years long. Whichever you select, you will only pay during that defined period of time.

Similarly to whole life, premiums for term life insurance are typically fixed, but they are usually more affordable than the permanent life - making it an attractive option. Consequently, by paying lower premiums, term life insurance does not include the cash value component that whole life provides. This means that the premiums you pay go directly toward providing a death benefit. The amount you receive is also flexible and can be tailored to pay off specific obligations like a mortgage or schooling for your children. When your policy does expire, you will have the option to renew, but your premiums will likely come at a higher rate.

Universal life insurance is a flexible and versatile form of permanent life insurance. It combines a death benefit with an investment component, which allows policyholders to customize coverage and cash value growth. Just like the other forms of insurance discussed above, the death benefit will be a tax-free payout that your beneficiaries receive if you pass away. The death benefit is typically adjustable as well. This provides you with financial flexibility as your needs change over time, like when you have a child or have finished paying off your mortgage.

When you purchase a universal life insurance policy, you’ll pay regular premiums. Part of these payments will cover the cost of insurance and administrative fees, while the remaining portion can be placed into tax-preferred investment options of your choice. This amount will then grow and can increase your savings, which can be used to supplement retirement income or act as an inheritance for your dependents. It is important to note that this option requires careful management. As a policyholder, you will need to monitor the cash value of your account to ensure it can sustain the policy over time. Consulting a financial advisor is recommended if you decide to go this route.

How can I learn more about life insurance?

No matter what stage you are at in life, it is always a good time to assess your situation and consider why a life insurance policy might be a good investment. As seen here, there are several options available and factors that can positively impact your family’s financial well-being. 

To learn more about the life insurance options available through BIG, request a quote online or contact your nearest branch today.

By: Devon Gribble