Universal Life Insurance or Permanent life insurance, which is generally more expensive than term, is designed to provide protection for a lifetime as long as the premiums are paid, and often provides a safe and tax-advantaged investment component that could help in retirement.

Whole life insurance covers you for the rest of your life, regardless of how long you may live. As long as you keep paying the premiums, your beneficiaries will receive the death benefit when you die. This policy is highly suitable for long-term responsibilities such as a dependent adult child's care or post-death expenses like estate taxes.

How Whole Life Insurance Works

One of the features of this type of life insurance is that it combines coverage with savings. Your insurance company puts part of your premium payments into a high-interest bank account or investment account. With every premium payment, your cash value increases.

The Policy can be fully paid in 10 or 20 years and after that period, the cash savings keep on increasing till you cash out the policy or you die and it is paid out to your beneficiaries tax free. It is one of the most tax-free advantaged way of transferring wealth.

Term plans are often purchased by people who may be younger, or are looking for the least expensive life insurance option, or may want to protect a debt that has a similar term, such as a mortgage. 

The terms are usually for 10 years, 20 years or 35 years. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.

Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term. Term life premiums (monthly payments) are based on a person’s age, health, and life expectancy.

How Term Life Insurance Works

When you buy a term life insurance policy, the insurance company determines the premiums based on the value of the policy (the payout amount) as well as your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.

If you die during the term of the policy, the insurer will pay the face value of the policy to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt among other things. However, if the policy expires before your death, there is no payout.

You may be able to renew a term policy at its expiration, but the premiums will be recalculated for your age at the time of renewal.

An annuity is a financial product that provides you with a guaranteed regular income. Typically, it is used during your retirement years and sold by an annuity provider, such as a life insurance company.

There are two types of annuities. A term annuity guarantees payout for a certain term and the contract expires. A life annuity guarantees payout for the rest of your life. Contract is terminated when you die.

Annuities may be the best retirement product that hardly anyone buys. Like defined benefit pensions, they provide guaranteed income for as long as you live. But while employer pensions are considered the gold standard of retirement income plans, few Canadians ever think about annuities. Economists have coined a term to describe their baffling unpopularity: “the annuity puzzle.”

Annuities are not for everyone but if you require guaranteed income for life, if you fear you may outlive your resources, then it is an amazing solution. People with annuities also tend to be more content, a peace of mind coming from the certainty of a guaranteed income.

So there are good reasons for retirees to give annuities more consideration. But annuities are not an all-or-nothing proposition. It’s best to think of them as one part of a larger retirement income plan: they can work uncommonly well in a portfolio alongside stocks and bonds (or GICs).

Edwin Masango - Financial Consultant

Edwin is the CEO of MoneyValue.

MoneyValue offers full Financial Planning Services in Ontario, Canada. Edwin has been in the financial sector for over 10 years. His passion is in protecting families from Financial ruin.

Life Insurance is a very important vehicle in protecting families and businesses, and Edwin has extensive experience and knowledge of Life Insurance.