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Purchasing life insurance for the first time can be daunting and can come across initially as an unneeded expense. The cost of life insurance varies depending on your age, health, gender, and the length of the policy. This begs the question, when is life insurance worth it?
In this article, we’ll take a look how life insurance policies protect their owners and why life insurance might (or might not) be worth it.
- You should have life insurance if someone is financially dependent on you
- There are a number of different reasons for purchasing life insurance
- Not everyone requires life insurance
- If life insurance is required, the majority of Canadians should purchase term life insurance
In This Article
- When Should You Buy Life Insurance
- Purchasing Property
- Growing Family
- Funeral Expenses
- Owning a Business
- When is Life Insurance Unnecessary?
When Should You Buy Life Insurance?
Life insurance is designed to protect people as they take on more financial responsibility and risk. As we pass certain milestones and accumulate assets, life insurance becomes a kind of safety net.
Below are a list of reasons why life insurance could be one of the best and smartest decisions you could ever make.
Getting married (or having a long-term partner) usually involves merging assets and accounts. This means that you will be involved in joint financial planning. In the event that one of you passes away, having a life insurance policy will minimize the financial impact on your partner.
There are two ways for couples to go about their life insurance plans. You can purchase a joint life insurance policy or two individual policies. A joint policy will pay out once after the first of the two insured lives passes away whereas an individual policy will cover both lives individually and pay out separately.
Joint policies used to provide larger savings years ago, but today there is typically not a large amount of savings provided when comparing a joint first-to-die life insurance policy to purchasing two individual policies. Although it depends on the situation, we almost always recommend to purchase individual policies compared to joint plans for a number of different reasons.
When you purchase a property, especially a family home, you will most likely be taking out a mortgage. This means that, although you live in your property, you won’t own it fully until your mortgage is paid off. Should you pass away unexpectedly without life insurance, your family may no longer be able to afford these payments and face losing the family home. There are two principle ways people use life insurance to manage this risk.
First, you can purchase a term life insurance policy. You can choose the length of the term (e.g. 20 or 25 years) to match the length of your mortgage payment term. The coverage that you choose (e.g. $500,000) is level for the length of the term. You pay the same amount every month, for the same amount of coverage.
The second option is taking out mortgage life insurance (also known as decreasing term life insurance). These plans are not recommended compared to a term life insurance policy. The coverage amount decreases as your mortgage debt decreases. The catch is that the bank will still charge you the same insurance premium, even though your coverage is decreasing every month.
It’s no secret that having kids is expensive. School fees, new clothes, driving lessons, college tuition — there are endless ways to spend on a growing family. For the primary earners in any given household, this is a lot of responsibility.
Taking out a life insurance policy when you have children is a simple way to guarantee their continued financial security even if you can’t be there. You can select an insurance amount according to your needs.
For example, if you have young children, you will want an amount large enough to replace your income and future education expenses if you are not around. Term life insurance fits for most families as it provides the most affordable premium and the highest amount of coverage. You will want to consider a term length anywhere from 10 to 25 years when looking for family protection.
Few people talk about the cost of a funeral and few realize just how expensive they can be: a burial in Canada costs between $5,000 and $10,000 and cremations between $2,000 and $5,000. A life insurance payout may cover the full cost of a funeral, easing any financial burden on family members as they deal with the emotional loss of a loved one.
There are certain life insurance policies designed to cover these kinds of expenses. The type of policy used to cover a permanent life insurance need such as funeral expenses would be whole life insurance. Whole life insurance covers you for exactly that, your whole life.
There are different types of whole life policies to choose from with the most affordable type being Term to 100 and Whole Life Participating being the most costly. The type of benefits you are looking for would determine the type of policy you would apply for. You have the flexibility of choosing the amount of coverage you want with the minimum amount being $5,000.
Owning a Business
If you own a business, it is more than likely a very good idea to consider life insurance. You may have debts within the business that would need to be taken care of in the event of death or possibly a key employee who is essential to the business. If something happened to yourself or one of your key employees, would the business require funds quickly?
It is financially wise to consider these scenarios to ensure that your business will continue to run, or at least can satisfy its obligations in the event that a key person is no longer around.
When Is Life Insurance Unnecessary?
So, now we understand why some may need life insurance, but when is it an unnecessary cost?
Life insurance is specifically designed for those with financial dependents who wish to shield their families from any lost income, debts or final expenses. If you are financially independent, do not have large loans, and don’t own property, life insurance is something you may not need to think about.
The other thing to keep in mind is that life insurance may not be a good way to invest. Many are sold the idea that their life insurance policy will help them save money for retirement. This is only relevant to whole life policies that come with a savings option. While it’s true that some plans do create cash value growth and might make some good investments with your premiums, the savings are often not as substantial as one might hope. In an article for Forbes, Larry Light stated that in his “35 years of doing financial planning. [he] has never, not once, seen anyone fully or partially retire on a life insurance investment.”
And there we have it! We hope this has shed some light on when and why you might (or might not!) want to purchase your own life insurance policy.
Frequently Asked Questions
Yes. If you have children who are relying on your financial income you should definitely have life insurance. You need to have a plan in place to protect your family in the event that you pass away prematurely. Someone will have to step in to take your place and having cash on hand will definitely make it easier for the surviving family members.
This is a question that we are asked quite often. The type of life insurance that you should purchase depends on why you require life insurance.
If your need for life insurance is temporary, such as protecting your family, covering debt or any outstanding loans you should consider term life insurance.
If you are requiring life insurance for estate purposes, taxes at death, funeral / final expenses, looking to leave a legacy or inheritance then you should be looking at whole life insurance which will last your entire life. We recommend speaking with one of our licensed brokers before purchasing.
The amount of life insurance coverage that you require is dependent on your situation and your need for life insurance. If you are looking to protect your family in the event that you are no longer here, we will want to take a look at your families lifestyles needs so that they can maintain their standard of living in the event that you pass away. Determining the cost of your lifestyle and how many years it is required will help with figuring out the amount of life insurance coverage that is required.
On the other hand, it might just be as easy as covering off a certain debt amount such as a mortgage. This makes choosing a coverage amount relatively easy. Contact us to learn more.
Wrongful or criminal deception intended to result in financial or personal gain.