Whole life, term, disability, critical illness, long-term care—insurance is available to cover almost every stage of life. But how do you determine what kind of insurance is right for you? Here is an overview of some common types of insurance and who can benefit most from each type.
Life insurance
“You need life insurance to protect your family,” says Chartered Professional Accountant Prem Malik of Queensbury Securities in Toronto. “What would happen to them if something happened to you? Everyone should consider life insurance from that perspective. If you have no debts or dependents, you may not need it, but if you do, it’s a must.”
There are two main types of life insurance—term and permanent, which is also known as whole life insurance. Term insurance provides level premiums and a death benefit that is paid only if you die within the period of time set out in the policy. You can generally extend the coverage, usually at a higher premium, as long as you don’t let the policy lapse.
Permanent insurance covers you for your entire life, and the death benefit will be paid as long as you pay your premiums. Permanent life insurance policies usually include an investment component, because the insurance company invests part of your premium to fund the policy.
One type of permanent insurance is universal life insurance, which has a higher investment component than traditional whole life insurance. A universal life insurance policy is similar to combining term insurance with a savings account. You set the premium and death benefit, control the savings in the investment portion and decide how to invest the money in the investment portion. As well, the interest, capital gains or dividends accumulate without attracting tax, and, upon death, the entire proceeds are free of tax.
“Term insurance is good if you temporarily need large amounts to cover your mortgage or other debt if you die,” explains Chartered Professional Accountant Lloyd Lindsay of Mississauga. “Permanent insurance is better for basic security, providing for dependents or for estate planning. Keep in mind that, within the two main categories of term and permanent life insurance, there are many diverse insurance products that provide different coverage, options and conditions.”
While formulas and Internet calculators can help you determine the life insurance coverage you need, be sure to consider your entire financial picture.
“Review your financial and insurance needs thoroughly with a financial advisor,” suggests Lindsay. “Factors affecting the amount of coverage you should have include your immediate needs, family structure, life stage, budget, size and duration of any debt, educational needs, your tax situation and what expenses will arise when you die.”
If you have a spouse, think about how his or her lifestyle would change upon your death. “Would your spouse leave their job or get a job?” asks Malik. “How much money would your spouse need to pay off debt and put your kids through school? Base the amount of insurance coverage you get on a realistic assessment of what you need and can afford.”
Disability insurance
Many employers offer long-term disability coverage as part of their group health and dental plan.
“However, if you are self-employed, it is critical that you have disability insurance coverage,” advises Malik.
If you earn a high salary or are the sole earner in your family, you may also want to consider disability insurance.
“It’s wise to consult an expert on disability insurance, because the policy options significantly influence the results at the time of a claim,” says Lindsay. “When you make a claim, you may be shocked to learn that the disability insurance proceeds you receive are far less than the coverage you thought you purchased.”
The tax treatment of group sickness and accident insurance plans depends on who contributes to them. “Employee contributions are not tax deductible,” explains Lindsay. “But, if the employee contributes 100 per cent to the plan, the benefits received are not taxable.” Where an employer makes a contribution, the contribution may not be taxable, but this will generally mean that any benefits you receive will be subject to tax. Given that the premiums paid under disability plans through work are generally relatively small, it is prudent to pay the premium yourself through payroll deductions to ensure that any future benefit you receive is tax-free.
Critical illness and long-term care insurance
Critical illness insurance helps pay the costs associated with life-altering illnesses such as cancer, heart attack and stroke. If you survive a set waiting period after diagnosis, the policy will typically pay you a lump sum cash payment.
“Having critical illness insurance means you are having a benefit paid while you recover,” says Malik. “Buying it is a very personal decision.”
Long-term care insurance helps pay the cost of services such as nursing care, personal care and homemaking care, in your home, in your community or in a long-term care facility.
Insurance in tax and estate planning
Whatever type of insurance you choose, make it an integral part of your tax and estate planning. For example, you can use life insurance to pay the taxes owing when you die.
“If you have a large estate, you may have a $1 million tax liability,” explains Malik. “If you develop an estate plan that includes a life insurance policy to cover the $1 million tax liability, your estate will be intact. Estate planning is the right way to use life insurance.”
© 2015 Chartered Professional Accountants of Ontario