(i) Permanent Life Insurance
- Whole life insurance – the standard in, and the most stable form of, permanent life insurance, whole life insurance provides guaranteed lifelong coverage to the insured. Whole life insurance also includes a savings/investment component, reflected in the cash value account. Gains accrue tax-deferred in whole life insurance and are withdrawn income-tax free upon the insured’s death. Premiums for whole life insurance can be paid over various time periods, depending on the insured’s objective.
- Universal life insurance – similar to whole life insurance but allows more flexibility to the insured to adjust the premiums, death benefit and cash value component.
- Variable life insurance – a type of permanent life insurance in which the benefits are determined by the underlying assets held in the policy.
(ii) Term Insurance
As suggested by its name, term life insurance provides a death benefit during a certain term of years. Term life insurance does not include a cash value account, and there is no savings or investment component. For these reasons, term is the most cost-effective form of life insurance for anyone who wants to insure their life for a finite amount of years (i.e., until their children graduate university). Similar to other forms of life insurance, proceeds from term life insurance are distributed income tax free to the beneficiaries.
(iii) Premium Financing
Financing the permanent life insurance premiums through loans. The classic form of premium financing involves the insured borrowing the premium but paying out-of-pocket accrued interest, although there is flexibility, allowing the insured to adjust the out-of-pocket amount paid, depending on the insured’s objectives and available liquidity.