Not everyone needs life insurance. The first thing to do is make sure you need it. Life insurance is really meant for your family members or other dependents who rely on your earnings. It is also used as the foundation of a solid financial plan – it protects your assets from probate fees and taxes.

Why You Buy Life Insurance

You buy life insurance so that, if you die, your dependents can live the same kind of life they live now. Strictly speaking, then, life insurance is not only a means of replacing your earnings in your absence but also the assets you worked hard to accumulate.

Life Insurance Comes in Two Flavors

If you do need life insurance, you should know that it comes in two basic flavors: term and cash-value insurance (also called “whole life” or “universal life” insurance). It all depends on your budget and your insurance needs which one to chose.

Term Life is Simple to Buy and Understand

Term life insurance is simple and straightforward. You pay an annual premium, and if you die, a lump sum is paid to your beneficiaries. Term life insurance gets its name because you buy the insurance for a specific term, such as 10, or 20 years (and sometimes longer). At the end of the term, you can renew your policy or get a different one. The big benefits of term is that it’s cheap and it’s simple.

Cash Value is Trickier

The other flavor is a permanent policy that contains cash-value. Many people are attracted to this type of policy because it lets them keep some of the premiums they pay over the years. After all, the reasoning goes, you pay for for 20, 30, or 40 years, so you might as well get some of the money back. With cash-value insurance, some of the premium money is kept in an account that is yours to keep or borrow against.

What’s the bottom line?

Cash-value policy is a complex a financial product for most people to deal with. Note, too, that any investment option that’s tax-deductible or tax-free—such as an RRSP or a TFSA is an alternative investment option than the investment portion of a cash-value policy. For these two reasons, I strongly encourage you to make sure your life insurance agent can explain the illustration so that you understand the risks involved and the advantages with this type of policy.

If you do decide to follow my advice and choose to get a life insurance policy, be sure that it is fully underwritten, rates guaranteed and that it is non-cancel-able and renewable. You want a policy that cannot be canceled under any circumstances, including poor health. (You have no way of knowing what your health will be like ten years from now.) Don’t get fooled by initial low rates or 5 year term polices from Costco. You want the rates locked in for 10, 20 or 35 years so that your rates don’t increase until it becomes un-affordable.  And you want to be able to renew the policy even if your health deteriorates. (You don’t want to go through a medical review each time a term is up and you need to renew.)

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