Everything you need to know about deferred life insurance
Deferred life insurance was created as an alternative for people who have trouble securing regular life insurance, often because they have pre-existing medical conditions.
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Losing a loved one is difficult enough without worrying about the financial challenges that naturally occur after a death. The deceased person’s family is left responsible to cover debts, mortgage payments, and daily expenses, often on their own. Life insurance serves as a vital financial safety net, providing peace of mind to individuals and their loved ones in times of uncertainty. Life insurance is set up by a policyholder to provide their beneficiary with a pre-determined amount of money to help them cover expenses when the policyholder passes away.
How to select the right type of life insurance
In the world of life insurance, there is no one-size-fits-all solution. While term life insurance and whole life insurance are the two main categories, there are many different types of life insurance related to both.
Insurance companies determine who to insure, and how much their premiums will cost, depending on how much risk is taken on by offering a policy. When it comes to life insurance, your health plays a crucial role in this assessment. If you're dealing with pre-existing medical conditions or are in poor health, you become riskier for the insurance company to cover. To put it simply, unhealthy people typically don’t live as long as healthy people, meaning that unhealthy people pose a greater risk to insurers.
This increased risk is why insurance companies might charge you higher premiums or, in some cases, decide not to provide coverage altogether.
Obtaining life insurance can be challenging for many, particularly those with pre-existing health conditions. That’s where deferred life insurance comes in.
What is a deferred life insurance plan?
Deferred life insurance was created as an alternative for people who have trouble securing regular life insurance, often because they have pre-existing medical conditions. It is a type of insurance policy that adds a waiting period before the full coverage kicks in.
What is a deferment period with life insurance?
This waiting period is also known as the deferment period. During the deferment period, the policyholder pays premiums just like they would with any other insurance. However, if the policyholder were to die within the deferment period, the policy might not pay out the full death benefit, unless the death is accidental.
While every policy and life insurance company differs, the deferment period is usually two years.
By waiting through the deferment period and consistently paying premiums, policyholders can eventually gain access to the full death benefit. This approach allows individuals to get the protection they need, even when faced with obstacles that may have otherwise prevented them from getting coverage.
It's essential to carefully review the terms and conditions of a deferred life insurance plan and work closely with an insurance professional to determine if it's the right choice for your specific situation and needs.
Deferred life insurance is usually sold as deferred term life insurance, rather than deferred whole life insurance.
What is the difference between term life insurance and whole life insurance?
Term life insurance is like renting protection for a set period. You pay premiums (monthly or annually) for a specific term, usually 10, 20, or 30 years. If you pass away during this term, your beneficiaries receive a death benefit payout, which can help cover expenses like mortgage payments, debts, and your family's financial needs. It's straightforward and cost-effective, making it an excellent choice for those seeking coverage without the added complexity of cash value or lifelong commitments. However, once the term ends, your coverage does too, and there's no cash value buildup.
Whole life insurance, on the other hand, is more like buying a home – it's a long-term commitment with built-in savings. You pay higher premiums compared to term insurance, but a portion of those premiums goes into a cash value account that grows over time, often at a guaranteed rate. This cash value can be withdrawn or borrowed during your lifetime, providing a source of financial flexibility. Whole life insurance doesn't have a set term; it's designed to cover you for your entire life as long as you keep paying the premiums. It's a solid choice if you want lifelong coverage and the potential to build wealth over time, but it comes at a higher cost than term insurance.
Read more about: how life insurance cash value works.
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How much does deferred life insurance cost?
The two primary providers of deferred life insurance in Canada are Canada Protection Plan and Industrial Alliance. Both companies provide policies that are similar in nature.
With both of these policies, if the policyholder dies within the first two years of coverage, their death benefit is limited to the return of premiums paid, plus a small amount of interest. That interest rate is 3% for Canada Protection Plan, and 5% for Industrial Alliance.
Deferred life insurance is more expensive than regular life insurance.
While the cost of a regular, $100,000, 20-year term life insurance policy for a 40-year-old in Canada is $252 per year, the average annual cost for a deferred life insurance policy for a 40-year-old is just under $500.
The bottom line
Life insurance is a key element of protection people purchase to ensure the financial needs of their loved ones are covered in the event of their death. Unfortunately, many people have pre-existing medical conditions that make it difficult for them to get traditional life insurance coverage. For these folks, deferred life insurance is a great option.
Deferred life insurance allows the insurance provider to mitigate some of the risk involved with the policy by reducing the amount they’d have to pay if the policyholder dies within the early days of their coverage. It also allows high-risk individuals to purchase coverage when they may not have been able to otherwise.