Buying life insurance is a little like buying shoes – one size does not fit all.

That's why there are many different types of life insurance products and each type will offer widely differing features and benefits. That way people can narrow down their choice to the type of life insurance that best fits their needs.

The Basics

Term
Term insurance is one of the simplest forms and initially least expensive types of life insurance. It provides a fixed amount of insurance for a specific period of time, with set premiums determined at the time of purchase. The most popular kind is 10 year term where the rates stay fixed in 10 year increments. When the 10 year term is up, the premiums increase but the coverage stays the same.

Term insurance typically ceases to be available once a person reaches their seventies or eighties, although it can be purchased at a younger age to cover a person up to one hundred years of age. Term insurance usually offers the maximum death benefit for the least amount of money.

Permanent (Whole Life)
Permanent, also known as whole life insurance, combines lifetime coverage with a savings or cash value component. Premiums are fixed. The upfront cost is greater than term, but the cash surrender value helps balance the higher cost of the policy at a later date. The cash surrender value is money returned to an insurance policy holder in the event that their policy is terminated before its maturity or the insured event. It is guaranteed and stated in the policy. When a policy is terminated, it releases the insurance company from further obligation to the policyholder. Often, whole life is used as an estate planning vehicle for payment of capital gains on death as well as final expenses for the deceased.

Universal Life

Universal life insurance is a product with a yearly renewable term insurance component and an investment component. Deposits are made and the interest and/or investment returns that accumulate within the plan are not taxable. Depending on your age, you can build up investment reserves to the point where the interest generated is able to pay the ongoing insurance premiums.

Universal Life has become very popular because the monies within the fund can be invested into market indexes like TSE 35's, S&P 500, and the Morgan Stanley World Index instruments. Since the accumulation is tax deferred, the build-up in monies can be significant. The policies allow you to place monies in excess of the minimum premiums with investments accumulating on a tax deferred basis. If you have maximized your RRSP's, UL can be an attractive non registered investment.

Variable Annuity Contract (Segregated Funds)
A variable annuity contract (often referred to as segregated funds in an insurance policy) offers investments with the growth potential of mutual funds and added security features such as a guaranteed return of principal. A segregated fund policy must be held for a defined period, typically at least ten years.

Life Insurance Riders
Riders allow the policyholder to meet short-term protection needs (coverage for additional people under the holder's policy) or extend coverage under certain conditions. Other types allow the policyholder to cover children up to twenty-five years of age under their policy or to receive additional payments in the event of their accidental death. Riders help people custom-fit their policy to better suit their needs.

Which Life Insurance Product is Right for Me?
Calculating your insurance needs and selecting the best type of insurance to meet those needs can be a time-consuming and difficult task. It is also one in which your financial advisor can add significant value and can assist you in making the selections that truly reflect your financial planning objectives. Speak to your financial advisor. They can help you assess which life insurance product fits your situation.

This article was compiled by John Klotz., B.A., CFP., CLU., CH.F.C., RHU. John is Assistant Vice President of LMS Prolink. He can be reached at johnk@lms.ca or phone (416)-595-7484 ext. 305