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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?
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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.
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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.
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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.
Also known as a “living benefit rider”, an accelerated death benefit is a rider that can be added to a life insurance policy. It allows the policy holder to access part of their policy death benefit if they have been diagnosed with a terminal illness. The funds are typically used for medical treatment and care.
Accidental death and dismemberment (AD&D) is a rider that can be added to a life insurance policy. AD&D issues a benefit if the insured person dies accidentally or suffers from dismemberment, such as the loss of a limb or the loss of use of a body part.
Accrued interest is interest that has been generated from a life insurance policy but that has not yet been paid out to the policy holder.
Actual age is a method that life insurance providers use to calculate the age of a life insurance applicant. Using this method, your age is determined by your most recent birthday. Another method used is “nearest age”, which determines your age based on whatever birthday is closest to the present date.
Actuarial tables are vital to life insurance companies. Sometimes known as mortality tables, they indicate the statistical probability of death of people based on factors like life expectancy, age, gender, health, and more.
An administrative expense refers to a business expense that is not part of the company’s main operations, such as production and sales. Administration expenses include things like salaries, benefits, insurance, etc.
Adverse selection refers to when sellers and buyers do not have the same information, such as a salesperson knowing the value of a product is less than its cost. In life insurance, adverse selection can include when an applicant does not disclose relevant information to the insurance provider.
A life insurance agent is responsible for selling life insurance policies to people and working with clients to process life insurance claims. In contrast to a life insurance broker, an agent works on behalf of a life insurance company.
When naming a beneficiary for a life insurance policy, there is typically a primary beneficiary and an alternate (or contingent) beneficiary. An alternate beneficiary is the person who receives the policy’s death benefit if the primary beneficiary is unable to claim it.
Annual renewable term (ART) life insurance is a form of term life insurance that offers one-year coverage that can be renewed every year. Because premiums increase with every annual renewal, ART life insurance is best for short-term coverage needs.
An annuity is a financial strategy offered by banks and insurance companies that invests a customer’s money in order to generate an income stream down the line. Annuities are most commonly used to bolster retirement funds.
In the context of life insurance, an applicant is the person applying for life insurance coverage.
A life insurance assignment enables a policy holder to transfer control of their life insurance policy to a third party—typically a close relative.
An Attending Physician Statement (APS) is a document issued by life insurance companies that must be filled in by a physician, providing an overview of a life insurance applicant’s health and medical history.
An automatic premium loan is primarily associated with permanent life insurance policies with a cash value. It enables life insurance providers to deduct any outstanding premiums from the policy’s cash value.
On life insurance applications, you may come across the term avocation. An avocation is simply a hobby, or an activity outside of work that you participate in. Certain avocations can influence your life insurance premium rates.
Backdating is a strategy life insurance applicants can use to lower their premiums with life insurance companies that use your nearest birthday to determine your age. If you are 29.5 years old, you can use backdating to secure a premium for a 29-year-old. You just have to pay premiums for the months that elapsed from your insurance age being 29.
A beneficiary is the person (or entity) that is named on a life insurance policy that will receive the death benefit when the insured dies. Typically, a beneficiary is a spouse, dependent or close relative, though organizations can also be named as beneficiaries.
Burial insurance, also known as final expense insurance, is a type of whole life insurance policy with a modest benefit (usually under $25,000) that is intended to cover funeral and burial costs.
Capital gains tax is a tax paid on the profit generated when an investment is sold. If you terminate a permanent life insurance policy, you will pay capital gains on any income exceeding the policy’s adjusted cost base.
If you terminate a permanent life insurance policy after a set period of time, the life insurance provider will pay you a sum of money, the cash surrender value. This amount is the cash value of the life insurance policy minus any surrender and administration fees.
Cash value life insurance refers to a type of permanent life insurance that comes with a cash value. The cash value increases over time as the policy holder pays into their policy and can be used as collateral for loans or to cover premiums.
A child protection rider can be added to a term life insurance policy to extend coverage to your child or children. With a child protection rider, the policy holder will receive a small death benefit should their child die within the coverage period.
In the context of life insurance, a claim is a request submitted by a beneficiary to the insurance provider when the insured dies to release the death benefit. Essential documents required for a life insurance claim are a death certificate, policy document, and claim form.
A collateral assignment is when a policy holder appoints a third party (usually a lender) as the primary beneficiary of their permanent life insurance policy in order to take out a loan.
In the life insurance industry, company ratings are carried out by independent groups and rank insurance providers based on their financial health. AM Best is one of the most popular online companies for life insurance company ratings.
Concealment refers to when a life insurance applicant does not divulge important information to the life insurance provider, including smoking status, health, avocations, and more. Concealment can lead to a terminated or voided life insurance policy.
A contestability period is a fraud-management clause in life insurance policies. It consists of a one or two-year period in which life insurance companies can review your coverage and deny potential claims.
A contingent beneficiary, also known as alternate beneficiary, is the person or entity who inherits a life insurance policy death benefit if the primary beneficiary can not longer claim it.
Conversion right, sometimes called conversion privilege, is a clause in group life insurance policies that lets the insured switch to an individual life insurance policy without having to undergo a medical exam and underwriting.
A convertible life insurance policy is a type of term life insurance that allows the policy holder to convert their coverage to a permanent life insurance policy without having to apply for a new policy.
In life insurance, coverage refers to the size of a policy. In other words, how much the death benefit is worth. A life insurance policy with $150,000 in coverage will issue a $150,000 death benefit if the insured dies within the coverage period.
A critical illness rider is an optional add-on for life insurance policies that pays out a tax-free lump sum if the insured is diagnosed with or suffers from a covered critical illness, such as a stroke or heart attack.