Your Trusted Advisor here! Today I will be going over how life insurance works in Canada. I know it’s not the most exciting topic out there, but I promise it will be more relevant to you and your family’s financial health than you think. So stay until the end of this video to find out WHY! I will be going over the basic terminology in a life insurance the different types of life insurance you can get in Canada how they REALLY work, and how to choose the life insurance that best suits you. I will try to keep it short and simple, so let’s get started! So why do we need a life insurance? That might be the first question that’s in your mind. I know that no one will wake up in the morning and say, Oh Yeah! I need to get one! But it doesn’t mean you can ignore it! It plays a huge role on the risk management side You can think of it as a gift for your loved ones in case you pass away sooner than you expect. It helps covering the cost of your funeral, any leftover debt or tax bills or even save your parents friends, or siblings from a financial burden. Basically, in a life insurance, you are making regular payments during your life, and in exchange the insurance company will guarantee a predetermined sum of money to your loved ones after your passing, and that’s why it’s formally called a death benefit. Now, before we get any further, let’s go over some basic terminology that we will come across in a life insurance. A policy is your agreement with the insurance company. This makes you a policyholder, because you are the person that owns the insurance. If you are well off though, you can also buy policies on behalf of your loved ones too. The payments you make regularly to the insurance company to maintain your policy, is called premium and premiums are generally paid monthly, quarterly, semi-annually, or annually. Lastly, the person who will receive your death benefit is called the beneficiary. It doesn’t have to be one person, you can choose to divide up the payout among several beneficiaries Oh actually, it doesn’t even have to be a person for that matter, It can be a charity, a company or even a trusted fund for theirs cats and dogs. Yeah! That’s right! In 2010, a person in Miami left her Chihuahua named Conchita an estimated worth of $11.3 million, and in 2011, an Italian woman left a stray cat a sum of $13 million! In case you are an accountant, and you are thinking about taxes all the time, in Canada, your beneficiary does not have to report life insurance payout as taxable income. When we talk about the different types of life insurance, it comes down to two major types: Term and Permanent. Term life insurance, as the term suggests, covers you for a specific period of time, usually ranging from 10 to 30 years. Say for example, when you get a policy with a 20 year term, the insurance company will pay your beneficiaries if you die within the next 20 years. With most policies, your premiums won’t increase during that time. Now, you might be wondering how much it costs for a Term life insurance. The cost of a life insurance largely depends on your health conditions and age, but if you are young and healthy, a $100,000 life insurance policy is only about the price of a Large pizza each month. If you sign up later in life though, your premium would be much more costly because you are at a higher risk, this is why if you can afford it, I would suggest you to sign up as early in life as you feel a life insurance is necessary. Term is a great option if you feel you only need coverage for a set period of time, say until your home mortgage is paid off or until your kids move out. Many term policies can be converted to permanent ones later in life, And there is no need to take another medical exam to renew your policy. Insurance providers have to renew the policy no matter what.. Oh and if you do interested in getting a short term life insurance policy, GOOD NEWS! Canada Life, one of the biggest insurance company is doing an exclusive promotion now. Once accepted, your first 4 months of premium is FREE! Making the coverage even more affordable! For details, you can see the attached link at the bottom! what happens if I still need insurance coverage when my term insurance expires. This brings us to our next type of life insurance, Permanent Life Insurance. It provides lifelong coverage instead of only a specific period of time. Premiums are typically locked in, but most of the time a lot higher in the beginning, maybe at the cost of 10 large pizzas each month instead of 1. In a term life insurance, if you still live beyond the term that you are covered for, then obviously your beneficiary won’t get paid, whereas in a permanent one, your beneficiary is bound to have a payout, unless of course, you are a vampire. Permanent insurance is mainly in 2 forms in Canada: Whole life insurance, or universal life insurance. For whole life insurance, your premium pays for your insurance coverage plus an investment portfolio that can grow your money over time. The insurance company manages that portfolio for you, aiming for low risk and moderate growth. And in case you are wondering again, Yes! these investments are also sheltered from taxation. Whole life insurance can be either participating or non-participating. In a par policy, you’ll share in the company’s profits in the form of dividends, which you can have extra cashflow reducing your premiums or boost your death benefit. The key advantage is once they give out the dividends, the insurance company cannot collect it back. So, unlike the stock market, the cash value inside whole life insurance policy cannot go down. Now, there are tons of controversy about the whole life insurance. One of them will be that you can only get either the cash value or the death benefits. Which is not true! For a lot of properly constructed whole life plan, you can get BOTH the cash value and payout, and each year they are indexed. On the other hand, the Universal life insurance gives you the highest degree of freedom. It acts more like investment accounts with a life insurance component. Instead of paying regular premiums, you can invest as much as a yacht, or as little as a cup of coffee you want into your account, with the freedom to manage it as you like. Another difference is that instead of being locked in, you have the ability to increase or decrease your premiums as you wish, according to your budget. Why? Mainly utilize the tax shelter room inside the policy. As you can see, because of the high degree of flexibility and freedom, many wealthy Canadians often use this type of policy to invest once they’ve maxed out their TFSAs and RRSPs. I know that was a lot of information on the different types of life insurance, you might be wondering how do you know how much coverage is enough for you? Or which product to choose from? First is always the coverage amount. Usually I will suggest get a coverage worth 7 to 10 times your annual salary. If Tom is making $100,000 for instance, then 1 million life insurance coverage is an ideal amount. Then depending on budget and the features you want, a whole life insurance, a term insurance. Or even a hybrid one, little bit of both sides might be a good suggestion. Usually I suggest all of your insurance premium combine should be no more than 10% of your income. Using 10% of your asset to cover the remaining 90%! If any of this sounds confusing to you, leave a comment down below or contact me directly, and I can explain in greater detail. Well September is here! Kids are going back to school! So don’t let your guards down! This is Thomas! If you want to know how money works and how you can work with money! Then I will see you next week! Bye Guys!
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