Most people know that they should have life insurance.
But with so many types of insurance and levels of coverage available, it’s easy to find yourself over-insured, under-insured, or covered by a policy that isn’t ideal for your situation.
The right life insurance is an important piece of your financial security. Paid to your beneficiary upon your death, it can help cover debts, funeral costs, and future expenses for your loved ones.
And beyond protecting your wealth, some life insurance policies can also help grow wealth.
Types of life insurance
Life insurance falls into two main categories: permanent or term.
Permanent insurance provides a guaranteed benefit amount upon your death. This type of coverage never expires or needs to be renewed, and the premiums won’t increase (unless for some reason you select ‘Yearly Renewal Term’).
Some types of permanent insurance allow you to save and access the accumulated cash value, which grows over the life of the policy. You can also choose a policy that pays dividends.
Term insurance is “temporary” coverage that lasts for a specified period of time, it’s purpose is to cover off short-term needs like paying off the mortgage, providing income replacement for your spouse and/or kids for a period of time, etc. It is usually a much lower premium than permanent insurance because it’s meant for a set period of time (usually 10-30 years) and premiums will typically increase if you decide to renew at the end of your term. Example: a Term10 policy will have significantly increased premiums in year 11, if you choose to renew it at the end of 10 years, so you should choose a term of time that meets your need, and then plan to cancel it by the renewal date.
There are benefits to both types of life insurance, and people may choose a combination of permanent and term insurance to meet their needs.
Choosing the right life insurance
It’s rare that clients come to us without any insurance at all.
More often, they have one or several policies and we discover most of the time, they aren’t optimized for their needs.
Just like the rest of your financial plan, life insurance requires a clear strategy to make sure you have enough coverage without paying unnecessary premiums.
There are a lot of misconceptions around insurance. Trust us, we’ve heard them all!
Here are a few of the most common ones:
Myth: “Life insurance is too expensive.”
Term life insurance is very cost-effective. A few examples based on current rates and a standard health history, a 40 year old male, non-smoker, $500,000 of coverage:
- Term10 for just $28/mth!
- Term20 instead (if he wanted coverage to last closer to retirement age) = still only $45/mth.
- Let’s say instead that he just wants a small policy to cover off a funeral and financial expenses whenever that may be, even if it’s when he’s age 100. A Term100 policy for $50,000 would be just $54/mth.
Permanent life insurance builds an investment in it as well that you can use as another asset in retirement. The monthly premium is really at your discretion. A lot of people choose to make a portion of their retirement contribution a whole like premium to diversify their wealth building from just the traditional RRSP and TFSAs route.
Life insurance can feel like a discretionary expense, especially when the cost of living is high. It’s tempting to delay buying insurance until you have more cash.
But waiting will just make it more expensive.
And if something happens in the meantime? Your loved ones would likely face a devastating financial hardship on top of their grief.
Myth: “My employer-provided life insurance is all I need.”
If you’re employed, life insurance is often included in your benefits package.
The amount is typically tied to your income and is usually a 1-2X multiple of your annual pay.
Sure, employer-provided life insurance is a nice perk. But depending on it alone is risky – most often it’s not near enough to cover off income replacement for the surviving spouse and kids until at least the kids are out of the house (even better is factoring in income replacement until retirement), paying off the mortgage and other debts, a lump sum for the survivor to put into retirement so their future is still secure, etc.
Losing or leaving your job could mean losing your insurance.
It’s also common for people to blindly purchase optional coverage (which is often far more expensive than your own personal policy!) and end up paying for coverage they don’t really need.
Choosing your own coverage gives you the flexibility to customize the terms, benefits and premiums for your current and future needs.
Myth: “I’m single with no dependents - I don’t need life insurance.”
When you’re young, single, and carefree, insurance might not even be on your radar.
Or you think it’s for later - when you’ve settled down.
If you think you’re too young for insurance, think again.
Young, healthy individuals enjoy lower premiums, which makes it an ideal time to purchase insurance.
You’ll enjoy more options and have a much easier time getting approved, too.
Even better, many policies allow you to add additional coverage later with guaranteed insurability.
Is your current life insurance working for you?
Life insurance review is part of our comprehensive financial planning process.
We also offer insurance strategy sessions for those who have specific concerns and/or don’t want to jump into full planning just yet.
If you need help navigating life insurance options, identifying coverage gaps, and customizing a plan, book a call today!