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How to navigate the world of life insurance

August 2nd, 2018

Financial planning for your death – oof! That’s heavy stuff. And that natural aversion people have to considering their own demise is one big reason why life insurance isn’t discussed more often. But, it’s a topic you may actually need to be thinking about.

What is life insurance?

Like any insurance product, life insurance is something you buy to protect you financially in the case of something going wrong. In this case, the something that is, well, your life ending. For most Canadians, this coverage is bought to protect loved ones against financial hardship when you die – proceeds from a policy can cover the loss of a breadwinner’s salary, support children’s education, pay off outstanding debt such as mortgages and lines of credit, and to pay for funeral costs, among other things. The process of becoming insured starts with getting a life insurance quote, but there are a few things you should know before you buy.

Term vs Permanent

There are two main categories: term and permanent.

Term polices are usually set for 5, 10, or 20-year periods and cover costs for temporary needs such as your mortgage, high living expenses for your family while your children are young, post-secondary education fees, student loans, or your private business costs. If you die during your purchased term, the policy will protect your family from these financial burdens. Term policies are the most popular form of policy because they tend to be relatively cheap and the rules of the coverage are relatively straightforward.

Permanent policies are generally for the remainder of your life. The two major offerings in this domain are universal life and whole life. Here’s where things get more complicated and more expensive (premiums on permanent policies can be as much as four or five times that of a 20-year term policy).

Permanent policies usually have an investment component within them, meaning your investments in the policy grow over time and offer the ability to “cash out” (access the savings portion of the policy) if you wish to cancel the policy early. A permanent policy should be considered if, for example, you want to leave behind a larger legacy for your loved ones, or you have special-care child dependants who may require funding even into adulthood. There are people, also, who use permanent policies as a way of saving money to leave behind inheritances because payments from them are usually tax-free.

Why and when to buy

While it might seem counterintuitive to buy coverage like this when you’re young and healthy, that could be the best time to buy. Those with arguably the greatest need are people with young families. Young parents often have large mortgages and the potentially escalating costs of supporting their children through school and university. The cost of raising a child to age 18 has been estimated to be around roughly $250,000 (as of 2016).

As you age towards retirement, your financial obligations – and, therefore, your coverage needs – may diminish. Likewise, young single people without dependants also have less coverage needs, beyond debt repayments and funeral costs.

How much is needed

This comes down to your personal needs, what your family requires, and what you want from your insurance. As a ballpark measure, the Canadian Life and Health Insurance Association says a figure of between five to seven times your current net income is a decent measure. But to really figure out your personal requirements, you should consider speaking with an independent insurance broker or financial advisor to better assess what you want in terms of assets, debts, and liabilities to leave behind for your loved ones.

Oof indeed. Planning for your personal finances and those of your family after you die definitely fits the definition of “heavy stuff”.  However, you should think of it like going to the dentist – it might not be the most fun, but you’ll feel better for doing it.

Article submitted by empowers Canadians to search smarter and save money by comparing mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance.

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