PROVIDING FOR YOUR LOVED ONES
If you're concerned about how your family will cope financially without you, life insurance may provide the protection they need. Life insurance pays out the death benefit usually within 30 days of death, while the rest of your estate may take weeks, or even years to settle.
 
In return for your monthly premiums, a life insurance company agrees to pay your beneficiaries a lump sum – called a death benefit – soon after you die, subject to certain conditions. A life insurance death benefit can be used for many purposes, including:

• your family's immediate and future living costs
• your children's future education bills
• your debts, including the remaining balance on your mortgage
• your funeral bills
• income and/or probate taxes due on your estate
• charitable donations

If you're a business owner, your partners might purchase enough life insurance that would enable them to buy out your share of the business when you die.

Make sure you name a beneficiary
An advantage of life insurance is that you can name a beneficiary and back-up beneficiary on your policy. If you name your "estate" as the beneficiary, the proceeds of the life insurance will pass through your estate, slowing down payment to your heirs and exposing a large lump sum to probate taxes, where applicable. However, if the purpose of the life insurance is to make sure there will be enough cash to pay the income tax bill, you may want the death benefit to be paid to the estate.

What type of insurance is right for you?
There are two basic types of life insurance: temporary and permanent. Temporary insurance covers you only for a specific period of time. Permanent insurance, including whole life and universal insurance, insures you for life.

TERM INSURANCE
A term policy provides insurance for a set time period as long as you pay the premiums. Some policies guarantee that you can renew them automatically after the term is up without proving you're still in good health. Others might reserve the right to refuse your renewal if your health has deteriorated. A term policy's lower initial premiums are attractive, but they will probably increase every time you renew, typically every one, five or 10 years.
 
If you're concerned about rising premiums, you can buy term insurance that guarantees a pre-set monthly cost until you reach a certain age, such as 75 or 100. In return for knowing the premiums will never increase, you pay more than you would for a renewable term policy. As with any life insurance policy, be sure to read the fine print for all the details of the policy.

The bottom line:

• lower initial premiums make term insurance affordable
• term insurance provides the most life insurance protection for your premium dollar
• term insurance provides good protection for a specific obligation, such as a mortgage

WHOLE LIFE INSURANCE
In addition to a death benefit, whole life insurance has an increasing cash value, so you can borrow from the policy when money is tight, or receive a lump sum if you need to cancel the policy. The premiums for whole life insurance are generally higher than term premiums. However, if you borrow money from your policy while you're alive, your beneficiaries will receive less then the full death benefit of the policy.

The bottom line:

• you're covered for life, as long as you continue to pay your premiums
• the growing cash value of the policy provides some flexibility

UNIVERSAL LIFE INSURANCE
Universal life insurance policies have both a life insurance component and an investment component. If you pay more than the minimum premium required, the money can be invested in a number of investment vehicles and grow on a tax-sheltered basis. Universal life insurance policies are more flexible than term or whole life insurance – you can increase or decrease your coverage as your circumstances change, or even reduce your premiums as long as you pay the minimum required.

Talk to your financial advisor or life insurance representative for information on how to compare the various features of universal life policies and how to maximize the tax-sheltering they can provide.

The bottom line:

• flexible terms allow you to modify your premiums when necessary
• can provide tax deferral advantages

Both whole and universal life insurance are available as "variable" life insurance policies. With variable life insurance, the death benefit and cash value of a policy is not guaranteed. Rather, it is tied to the performance of a portfolio of investments.

SEGREGATED FUNDS
A segregated fund is a form of life insurance that is also a managed investment product similar to a mutual fund. Most segregated funds provide a death benefit that guarantees your beneficiaries will receive no less than 75% or 100% of your initial investment. If the market value of your investment at your death is greater than your initial investment, your beneficiaries would receive the larger amount.

Similar to other types of life insurance, the value of the segregated fund can be paid directly to a named beneficiary on your death and is not subject to probate tax.

The bottom line:

• segregated funds can provide the investment diversification and growth potential of mutual funds
• segregated funds may offer protection from creditors

JOINT LIFE INSURANCE
There are two types of joint life insurance: joint first to die and joint second to die. With a joint first to die policy, the death benefit is paid out to the survivor when the first policyholder dies. In a joint second to die policy, the death benefit is paid to the beneficiaries after both policyholders die. Since assets can be passed to a surviving spouse without triggering any income tax, a joint second to die policy is often used to provide the cash to pay the income taxes on an estate before the money passes to the next generation.

BENEFIT WHILE YOU ARE ALIVE
If you become terminally ill, you might be able to negotiate with your insurance company to receive a living benefit. Essentially, a living benefit allows you to receive some of the death benefit in your policy while you're still alive. This can be tremendously helpful to pay for medical expenses and additional care. There is also insurance you can purchase specifically for medical care, called "Critical Illness Insurance".

How much insurance do I need?
Discuss your life insurance requirements with your financial advisor or life insurance representative. Select enough life insurance in combination with all other estate planning strategies, to cover your family's immediate and long-term financial needs following your death. As a rule of thumb, you might require between five and ten times your gross annual income.

Of course, your family circumstances will change and the insurance you purchase now might be either too much or too little five years down the road. As with all other elements of your estate plan, review your life insurance policy periodically to make sure it still meets your needs.

Thank you to our estate planning expert
Mackenzie would like to thank Sandra Foster, author of You Can't Take It with You: The Common-Sense Guide to Estate Planning for Canadians, for her invaluable assistance.