Life insurance is the Foundation of your Financial Life
Written by Cathy Leahy
Life insurance is one of those things you can’t touch it, feel it or see it. Most people never want to discuss life insurance or see a life insurance agent, but it is the foundation of a good financial plan. Without life insurance, an unexpected early death could crumble the rest of the plan.
Much to our surprise the two things we are guaranteed in life is that we are born and we die. To keep it simple, let’s cover the different types of life insurance and the main concerns of clients main when they come to see me.
Buying life insurance without proper analysis
I work in an insurance brokerage firm, where other brokers sell home, auto, commercial, farm and ranch insurance. As a result, I see many people when they have bought a new home or remortgaged their home. I find that most people do not really understand life insurance and what type they have or why they have the kind they do. Many simply tick off ‘yes’ at the bank or the mortgage company. Most people want to be sure the home is paid for if they were to die early. Many do not think of the other debts and one of the most important reasons; survivor income for those left behind. Also a beneficiary and contingent beneficiaries are needed so the proceeds do not have to sit and wait for the estate to be settled before the monies can be dispersed.
I find that most people are willing to spend far more insuring their “things” than themselves. Without you; how is your family going to pay for the “things” that are so important. If you buy your life insurance while you are young and healthy it is more affordable than you might think. In fact, it can be more affordable than other insurance policies. For example I recently quoted a $500,000 Term 30 policy for a 21 year old Male $41.65 per month. This far less than the cost of insurance for their $50,000 vehicle.
What kind of life insurance?
There are three main types of life insurance:
· Term Insurance
· Whole Life
· Universal Life
Term insurance is simple pure insurance with no complicated parts to it. You are guaranteed to pay the premiums listed in your policy and the policy will end generally between the ages of 65 to 90. Every companies product varies. The premiums increase in Term insurance at every renewal period:
· Term 5 – every 5 years the premiums (the payments you make) will increase.
· Term 10 – increases every 10 years
· Term 20 – increases every 20 years
· Term 30 – increases every 30 years
· Term 100 – level premiums for “Life”
Term insurance is meant to cover “Your Needs” for a period of time. After that time, it can be canceled, rather than renewed at the higher premiums because the need for insurance no longer exists. For many clients I do a combination of different Terms. For the young married clients with children and a spouse who either stays home or works part time;
· Term 10 – would cover any short term needs – debts that will be done in 10 years
· Term 20 – would cover the income needs for the family while the children are growing up
· Term 30 – would cover the mortgage for the life of the mortgage
· Term 100 – would cover any longer term needs there may for income replacement for the spouse, final expenses and if the estate will incur and taxes due.
You often hear of Riders on a policy this means these are extras added on to the main policy. There are many types or riders but you should choose wisely and choose the ones that would be needed most by you or your family. The three riders I use the most for clients are:
Child Life and Critical Illness – which are very good value for a family with children
Critical Illness – most people do not have critical illness coverage (this is another topic to explain)
Whole Life Insurance
The main reason to buy one of these policies would be to have insurance as long as you live to pay for final expense or leave a small survivor income. Premiums are generally higher on these policies as you you tend to keep these policies longer therefor thy have a greater chance of being paid out. Most of these products have a level premium for your whole life and many build a cash surrender value. You may also choose options to “Pay up the policy early”.
Generally there are several options to choose for the “Dividends” (Dividends in life insurance are usually not guaranteed and are defined as a refund of premiums – that would be why you do not claim these dividends as income on your taxes each year)
You can take a “loan” on your cash value or you can surrender your policy and take only the cash value. When you do this there may be taxes payable on the cash surrender value.
These are the most complicated and varied policies. The policies have two components an insurance portion and an investment portion. These policies are mainly sold to cover a more complicated need life protecting a business, farm or for a larger estate. Sometimes they may be sold with no intention of using the savings portion and simply sold for the value of the Term insurance of the policy. The policy can tax shelter the growth of the investment. Many business owners will buy these types of policies.
The need for insurance is often greater when young, as you have debts and dependents, slowly the debts are paid off, children grow up, you begin to accumulate assets (RRSPs, TFSAs, house).
Before you buy life insurance, you should know that you are getting a product that is good value and fully underwritten. If you have life insurance, it is important that you understand what you have, why you have it, and if it is performing as promised. Every person and business has different needs which change through your life. An Insurance Specialist is trained to review these issues for you eliminating the need to buy over the phone/online or at the bank/mortgage company.