People buy Life Insurance to replace a financial loss that would result from a death. For example, a “Bread Winners” future income may need to be replaced. Frequently, Life Insurance is used to create an estate for survivors, or to provide a pool of money to pay income tax owed by the deceased.
The amount you pay to buy Life Insurance is called the ‘Premium’. This amount will vary, depending upon:
- The type of insurance you purchase:
- Term Insurance
- Permanent Insurance
- Universal Life Insurance
- The company you buy insurance from, your age, gender, and physical condition;
- Whether or not you smoke.
You must apply for Life Insurance, however once approved, the insurance company must continue to cover you, as long as you pay your premiums.
In the event of a death, a “death claim” is filed. Once approved, a lump sum tax-free amount is paid directly to the beneficiary. If the beneficiary is a person, the payment is made directly and bypasses the estate and, as a result, avoid probate fees.
Life insurance is frequently used as a tax shelter, as federal legislation permits additional funds to be invested within the policy on a tax-exempt basis. This important tax-planning tool is used to defer or avoid taxation.
The design of proper Life Insurance coverage is an important issue, as part of an individual financial plan. Hatch & Muir are Chartered Life Underwriters and Certified Financial Planners. We can provide you with advice in designing your insurance program.
Key issues to consider when purchasing Life Insurance:
The amount of Life Insurance required to provide income for a surviving individual or family depends upon:
- The amount of income required by each survivor
- The survivor’s Tax Rates
- The duration over which income will be required
- A pre-tax investment return
In addition, capital may be required to pay:
- Final Expenses including burial expenses
- Probate fees
- Other debts such as the mortgage on the family home
- Costs associated with post-secondary education for survivors, and
- Income taxes upon death
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Term Life Insurance
Term life insurance provides coverage for a specified period of time – the term of the policy. Term Insurance may be purchased for a variety of durations ie. 5-year, 10-year, 20-year etc. Two important features that may be included are renewability without medical evidence and convertibility to permanent insurance. Your policy is paid out only upon death within duration of the term. Term life insurance is the lowest priced insurance on the market. It allows you to save substantially on the life insurance premium.
Whole Life Insurance
Whole life insurance features a level premium and level death benefit to age 100 with an accumulating cash value that increases over time until it equals the set death benefit. Whole Life Insurance covers you for as long as you live. Whole Life Insurance pays a death benefit to the beneficiary you name and offers you a cash value account and tax-deferred cash accumulation. The policy remains in force during your entire lifetime and provides permanent protection for your dependants while building a cash value account. The insurance company manages your policy’s cash account.
Universal Life Insurance
Universal Life is a combination of term life insurance with an investment component attached. It is a flexible policy that lets you vary your premium payments and/or adjust the face amount of your coverage. The premiums you paym, less the cost of insurance, are credited to an investment component within the policy. The insurance company manages your investment component.