Last year I spoke with representatives from the insurance industry to learn about how life insurance works from a client’s point of view. There seems to be 2 difference kinds of insurance plans: term, and permanent.
Term life insurance will insure someone for a specified length of time like 5, 10, or 20 years. A premium is paid every year and if the person dies within the time period then the policy pays out the death benefit to the beneficiary. This is the most straightforward life insurance plan and works very much like auto insurance. A fee (premium) is paid to insure something for a limited period of time.
Permanent life insurance is a little more complicated because it branches out into sub-categories like participating, non-participating, universal, etc. But all of them are basically policies that insure you for as long as you live 🙂 For example, when I had a quote done for myself I could pay $3000 a year in premiums for the next 20 years, and then stop paying forever. My hypothetical death benefit is $250,000, but everyone’s insurance amount will likely be different.
The cost of the premium will depend on age and if you are a smoker or non-smoker. $2000 a year is pretty cheap for $250,000 coverage. But if I was 50 years old today and began smoking tobacco, then my premium would be many times higher. The cost of life insurance may also differ from country to country. I’ve heard some insurance costs are cheaper in Australia.
The most prominent reason to have life insurance is to financially protect one’s dependents. But another reason may be for one’s own retirement savings. With a participating life insurance for example, policy holders will share in the profits if the insurance company makes money. With universal life insurance a part of the premium will go into an investment fund that can grow over time. In either case it’s a bit like forcing oneself to save, similar to paying a mortgage. When a person retires one day he or she could cash out the investment part of the insurance policy 🙂 People should consider getting life insurance if they have children, or plan to have dependents in the future, or if they want another way to save for their future outside of an RRSP.
Random Useless Fact: It’s called “slang” because it’s short for shortened language.