There is no denying that thinking about life insurance can make some of us feel uneasy. No one wants to think about the “what if” scenarios, especially when children are involved. There’s also the stress of adding an extra monthly expense, finding the time to figure out what type of life insurance you might need, for how long and for how much. It can feel overwhelming! We cover all of these points, with the goal of helping you understand the role of life insurance, the types you can get and when you need it and when you don’t.
The Purpose of Life Insurance
The main purpose of life insurance is to protect your loved ones from financial burden when you die. The main benefit for you of having it, is the peace of mind you’ll feel knowing that if you aren’t around, your loved ones will be okay financially.
A life insurance death benefit could be used to cover funeral costs, capital gains from settling an estate (think family cottage) and most commonly, to ensure the people who rely on you financially, like a partner, children or other dependents can cover living expenses, future education costs, retirement savings and more.
That said, if you have no dependents, or if you have a partner or other dependents who would be financially stable without you, then you may not need life insurance. The best thing to do is speak with a financial professional to review your estate plan and how it may affect your loved ones. This will help you make an informed decision.
Types of life insurance
If you decide you need insurance, the next step is to determine what type you need. This can vary from person to person and may change over time, as one’s life changes. Below is an overview of the most common options.
Term Life Insurance
Term insurance is the most common type of life insurance, since it provides coverage for the exact time period you need it (hence the name “term” insurance), and the amount you need, and is generally very affordable.
Term insurance requires the insured to pay a fixed annual premium, for the term (length of time you decided on) of the policy, and promises to pay a death benefit to a beneficiary if, and only if, during the term of the policy, the insured dies.
The amount of the death benefit is determined by you ahead of time, depending on what your family’s financial needs are. Once the term ends, the premiums are no longer due, the policy is considered cancelled and no death benefit is paid out.
For example, you may decide on a term of 30 years for $1M, which might cover the mortgage and allow your family to afford to save for an education, retirement and to stay in the family home. During those 30 years, if you were to die, your beneficiary would receive a death benefit of $1M, tax-free.
Once the term of the policy ends, you can decide whether to renew the policy (pending approval by insurance provider), you can get quotes for a new policy with another provider (highly recommended if you decide you still want coverage) or if it doesn’t serve a purpose anymore, you can cancel it.
Permanent Life Insurance
Permanent life insurance covers you for your whole life, and pays a death benefit no matter when you die, as long as you pay your premiums. These types of policies also include a cash value component, like an investment account, that you can withdraw or borrow against while you are still alive.
While this may sound great on paper, there are several things to consider with permanent life insurance policies and it’s strongly recommended that you speak with a professional (perhaps even a few) about your options so that you understand the risks and benefits.
There are many types of permanent life insurance but these are the three main types:
Whole Life Insurance
This type of policy has a fixed premium as well as a cash value and dividend component that accumulate over time. (This is where you need to ask yourself whether investing in a different way, like in your RRSP or TFSA would be more beneficial). Upon death, your beneficiary receives the full death benefit, but not the accumulated cash value.
The main benefit of universal life is that it allows you to adjust your premiums and death benefit as your life changes. For example, if you have kids, you may want to increase your coverage to provide for their education and living expenses until they are an adult. This type of policy is usually more expensive because it offers flexibility. Upon death, the beneficiary receives the death benefit and cash value.
Term to 100
This basic permanent policy has a set premium paid until the age of 100. (There are options for different payment terms). After 100 there are no premiums but the policy remains. The beneficiary receives a tax-free payout of the fixed death benefit. There is no cash value component.
Cost of Insurance
The monthly or annual payment you make for your policy is called the premium. The premium is based on a number of factors, including the amount of coverage you require, the length of time you need it, your age, gender, current health, family health history, job (occupational hazards), hobbies, amount you travel, etcetera.
Premiums can start for as low as about $15 -$20 per month. Any reputable insurance broker will provide a survey of 25+ quotes from a variety of insurance companies so that you can compare costs and terms. The most important take-away here is that life insurance can be very affordable and the financial protection it offers is invaluable. At the very least, it’s worth investing.
Amount & Term of Life Insurance
Here are some things you might take into consideration when deciding how much coverage you need and for how long:
- How much debt do you currently have and how long will it take you to pay it off?
- Do you plan to take on more debt in the near future? (I.e., family cottage, vehicle, home renovation).
- How much do you and your family currently spend on day-to-day living?
- How much do you save monthly for education, retirement, travel?
- How much capital gains would your estate have to pay upon your death? Does this change if you and your partner both die at the same time?
Since life insurance can be used for a variety of purposes, this list of questions is not exhaustive, but certainly covers the most common things to consider when determining the amount of coverage.
Process of Getting Life Insurance
The process of applying for life insurance depends on the type of insurance you are applying for. In general, the first step is to complete an application that asks for information about you and the factors that may affect your coverage such as your health, family health history, occupation, travel habits, etcetera.
Based on your application, the insurance company will decide if they require a medical from you. This could be as simple as sending a nurse to draw blood to a request for more information from your doctor.
Once the insurance company has the complete application and medical information they require, they will either approve or decline the application. In some cases, they will decline with an offer to reapply once there is an improvement in your health. The process is very streamlined and a good insurance broker can keep this process moving forward at a good pace.
Life Insurance at Work
Many employers offer life insurance policies for their employees. While this is a wonderful gesture, be sure you review the policy. Consider the amount of coverage, who the named beneficiary is and the length of the policy. Do the terms protect you adequately? Remember, the policy isn’t based on your personal finances, and may not be enough coverage for your family.
Consider also that the policy is tied to your employment. If you leave your job, do you have the option of taking the policy with you? It may be to your advantage to treat the policy as an added bonus, and to get your own, so that no matter who you work for, you always have coverage that you are in control of and that provides adequate coverage.
Things to Pay Attention To
Here are a few things to pay attention to:
- Some term policies renew automatically and charge higher premiums since the insurance company will err on the side of caution and assume you are a greater risk health-wise. Review your policy 1 year to 6 months before the expiry date and determine whether you still need coverage. In most cases, it’s to your advantage to get fresh quotes instead of automatically renewing.
- Take note of any riders (additional coverage for specific things) or exclusions (things the policy won’t cover) on your policy.
- Insurance policies for children are rarely recommended. If someone tries to convince you otherwise, seek a second opinion.
So, Do You Need Life Insurance?
The simplest way to think of it is this: if you have a partner, children or other dependents in your life who would not be financially sound if you passed away, you need life insurance.