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Let's review the only two kinds of life insurance that you need to know about.

Temporary Insurance

This is called "term insurance," which means you own it for a defined period of time, so long as you make the payments on it. Typically, people buy a 10-year term, with it being automatically renewed for subsequent terms, but at ever-higher rates. As you age, you become statistically more likely to die, so the insurance cost rises.

To get term insurance, count on filing out a detailed application form, then being contacted by one or two people who will grill you on various financial aspects of your life (the more insurance you want, the more questions), and having a medical examination that will include blood work, a urine sample, electrocardiogram and various fingers stuck in various orifices. The process usually takes a couple of months, from application to approval.

Term insurance is relatively cheap, and as the banks all get into this business, that trend will continue.

You should buy it for very specific purposes, like providing a tax-free lump sum payment to your spouse or family upon your death; to pay off an outstanding mortgage or other debts; to finance children's educations; and for funeral expenses.

You should expect the insurer to offer you guaranteed premiums over the term of the insurance, regardless of changes to your age or health; renewable coverage with no medical exam or questions at the end of each term until you reach a certain age (typically 80); and the ability to convert a term policy into a permanent one, also until a specified age (like 69).

These days you can get much of the approval process done online, but you still have to undress for the physical.

Permanent Insurance

There are a few variations, including whole life, variable life and universal life.

This kind of insurance is more flexible; it lasts your entire life; and it can play an integral part in lifetime financial planning, including providing tax-free retirement income.

Whole life pays you a guaranteed death benefit like term insurance, in return for you making premium payments that stay the same forever, regardless of age or health. The younger you sign up, then the lower these payments will be. A whole life policy also has a cash value that builds up over time, and you can borrow against that at relatively low rates, or use it to make your premium payments.

Whole life costs more than term insurance and it is a truism is that most people are better off "buying term and investing the difference,"

Variable life

is just that - unpredictable. So, while the premiums you have to make stay the same, the actual cash value of the policy fluctuates according to the performance of the investment assets you choose to have the policy invest in. The death benefit part is guaranteed. Given the fact that you might have this kind of policy in place for ten, 20 or 30 years, hitching it to a major stock market through an index fund is probably a brilliant move.

Universal life

is divided into two parts - a basic term insurance policy that will pay a stated death benefit so long as basic premiums are paid, and an investment account. You are allowed to put more money into this policy than is required for the basic death coverage, and that additional sum goes into a tax-free account, just like an RRSP. Within that account, you can elect to invest in just about any kind of asset you want, from fixed-income bonds to high-octane index or equity growth funds.

Upon retirement, you can use all the accumulated cash inside the plan as collateral at the bank to receive a loan paying you income for the rest of your life. The most outrageous aspect of this plan is that, because the money is flowing from the proceeds of a life insurance policy, the retirement income is tax-free. You can also roll it over inside your estate on a tax-advantaged basis.

Caution: Be aware that the section of the Income Tax Act which allows this tax-free pension to be enjoyed might be repealed. In fact, I'm sure it will be since it's such a sweet deal. However, any existing insurance policies stand an excellent chance of being grand fathered. Interested? Then do it - now.


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