Life insurance basics: what it is for, and the two main kinds

When I worked in finance I could read a company's books, and I could not have told you what would happen to my family if something happened to me. So I understand why people put this off. Here is the plain version.

What it is for

Life insurance is a contract: you pay a regular amount, and if you die while the policy is in force, the insurer pays a lump sum to the people you named. That is the whole mechanism.

Its purpose is to replace what your presence provided: income, childcare, the other half of the rent, the ability to keep paying a mortgage or support parents. It is not for you. It is for the people who would be financially exposed without you.

The question before the product

Before any policy type makes sense, the household needs an honest answer to one question:

If my income stopped permanently tomorrow, who would be affected, for how long, and what would it take to hold their life steady?

Someone with a partner, young children and a mortgage has a large, long answer. A single person with no dependants and no co-signed debt may have almost none. Everything else follows from that answer, not from a brochure.

start with who, not with which

The two main kinds

Term insurance covers you for a fixed period: a number of years, or until a certain age. If you die in that window, it pays. If the term ends, the coverage ends, unless it is renewed or converted. Because it covers a defined period, it is generally the simpler and less expensive way to cover a large need that has an end date, such as the years until children are independent or a mortgage is paid.

Permanent insurance is designed to stay in force for your whole life, as long as it is paid for. It costs more, and some types build a cash value inside the policy over time. It is used for needs that do not expire: final expenses, an estate that will owe tax, a dependant who will need support for life, or certain business and estate situations.

Many households use term for the big temporary need and consider permanent only for a specific permanent reason. Which combination, and how much, is a personal conversation.

Things that are true for everyone

• Honesty on the application matters. Health and lifestyle questions decide the price and the validity. An answer that was not true can void a claim later.
• Name a beneficiary directly. Money paid to a named person generally passes outside the estate, faster and without probate.
• Review it when life changes. Marriage, a child, a home, a separation, a new country. The need moves; the policy should be checked.
• Group coverage through work is a layer, not a plan. It usually ends with the job.

Where this guide stops

This page explains what the category is. It cannot tell you whether you need it or how much. That is a conversation about your own situation, and when I have that conversation I am acting as Pushpa Kumari, Licensed Life & Accident/Sickness Insurance Agent (Ontario), and I will say so plainly.