Not everyone will need life insurance.
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Life insurance is a type of financial protection that pays out a sum of money upon the death of the insured person.
Why should I consider Life Insurance?
Life insurance can help provide financial support to the your loved ones after your passing.
If you have dependants, such as children or a spouse who rely on their income, you may need life insurance to ensure your loved ones are financially protected if you pass away. Additionally, if you have outstanding debts, such as mortgages or student loans, you may want to consider life insurance to ensure your debts are paid off and your loved ones are not left with the burden. If you are a business owner, you may also need life insurance to protect your business and employees in the event of your death.
What Is Life Insurance?
Life insurance is a contract between an insurance company and an insurance holder to provide a sum on money that is tax-free to the insurance holder’s beneficiary in case they pass away. The money that is paid out, called a death benefit, is meant to help the policyholder’s family financially in case they lose the revenue they were depending on. The policyholder has to pay a prearranged monthly premium to the insurance company. An insurance policy is like a safety net to cover your dependants in case you die.
Who is Life Coverage designed For?
Life coverage is designed for young working adults who have families. This is because this insurance cover is supposed to financially fill in for you once you pass on. As a breadwinner, your salary is part of your value to your family. You will want everyone to be taken care of for at least 5-7 years after your death. Even if you are not working, you still have financial value to those you take care of. If you are a stay-at-home dad, your spouse will need financial help to take care of the kids in an unfortunate event that you are no longer there to do so.
It appears that younger individuals, specifically those in their 20s, are the age group that tend to buy term life insurance the most. This is likely due to the fact that younger individuals may have dependants, such as children or a spouse, who rely on their income and would benefit from financial support in the event of their death.
You don’t need to buy a huge policy; you can buy an insurance policy that fits your family’s financial needs. Today, most people purchase a cover once they get married or have their first child, especially if one of the parents make more money than the other. Married couples buy insurance coverage if either of the spouses has other financial responsibilities such as taking care of younger siblings or aging parents.
- 44 per cent of Canadians don’t have life insurance.
- 80 per cent of Canadians believe Canadian life insurance rates are too expensive.
- Permanent life insurance can cost up to ten times more than term life insurance.
- 62 per cent of Canadians with life insurance have it through their employer.
- 77 per cent of Canadian parents with dependant children have a life insurance policy.
Insurance Coverage for Retired People
When a person reaches retirement age, they may not need an insurance cover anymore. Their dependants are most likely financially independent and they are living on investment income or retirement savings. Older people keep their insurance policies for their significant other to cover for future unexpected long-term medical expenses. Others still keep their policies to pay for their end-of-life costs such as settling an estate and to cover funeral costs.
Other Reasons for Buying Life Coverage
Another common reason for buying life coverage is to pay for certain expenses such as mortgages. If you purchase a house and you have signed up for a 25-year mortgage payment, it’s essential to plan ahead. What will happen if you die after five years? Today, there are specific policies that cover mortgages, and the payments will decrease in value as the debt reduces.
Another uncommon reason for purchasing an insurance cover is business. People are taking out an insurance policy to ensure that their companies are taken care of once they die. The payout could help the business before your company learns how to stay afloat without you.
Two Types of Insurance Coverage
There are two types of insurance covers, permanent and time life covers. The two vary in structure and cost.
1. Term life coverage
This is the most affordable insurance cover and is often the most practical option for young families. The cover is priced and designed to run out when you no longer need it. With a term insurance policy, you lock the premium payments for a particular duration of time and your premium will go up at the end of the term. Ideally, a term insurance policy will only cover you for the duration you will need insurance and ends when your dependants are financially independent or until you finish paying off your mortgage. The most common term life policies often run between 10 to 30 years.
- It is best for business owners, young families and property owners with mortgages
- When you’re young, it’s initially less expensive than permanent insurance
- You can buy numerous covers
- It is easier to comprehend than a permanent insurance policy.
- It is the perfect policy for people looking for temporary coverage
2. Permanent life coverage
This type of insurance coverage does not expire or renew like term insurance cover. Provided you make all the required payments, your dependants are guaranteed a payout after your death. This is permanent life-long insurance coverage that covers your dependants from the financial effects of your death. It is the best cover for individuals with long-term life perspectives, and its premiums are higher than term insurance.
- The policy covers you even after your heath deteriorates
- With most permanent insurance policies, the cost is guaranteed never to go up
- Premiums paid later in life are less costly than those of term insurance
- You can borrow or cash in against the accumulated value
- It’s the best option if you are in the higher tax group
- It’s most cost-effective if you have a large estate that you would like to leave to your family or charity organizations
What Is the Best Insurance Coverage for Me?
Determining the best cover for your family is a struggle for most people who are just starting to look at life insurance. In most circumstances, term insurance policy is often the best option for people who are just beginning to build a life, despite it having an expiry date. If you have a young family, having an extra layer of protection for your dependants is not a bad thing, they may need it one day.
Term insurance allows you to provide coverage for your family only when it matters. There is no need of paying for insurance when you don’t really need it. After your mortgage is paid off and the children are financially independent, you can use the monthly premiums to save up for retirement.
Who Needs Insurance Coverage?
Life coverage is not a necessity for everyone. There is a straightforward way of determining if you need an insurance policy- if you have a dependent who relies on you financially, you may want to get a policy as soon as possible. Having a policy could be the difference between your dependants sleeping hungry ad being able to keep a roof over their head if you passed away. However, not everyone will need it. Below are certain types of individuals who may not need insurance:
1. If you are a single person without any dependants and your demise will not have any financial effects on your loved ones, children, parents or other people close to you.
2. If you have enough savings to cover your family’s everyday expenses in case you die or you are a parent who is already retired and enjoying your retirement savings and investments.
3. Young children. Most people take out an insurance cover on their children, but is it necessary? If your child is not financially contributing to your household, there is no need to take out a policy on them.
How much life coverage do you need?
Taking out life coverage is a small part of your financial plan. The amount you pay for the insurance depends on your personal specific needs and the condition of your family. How many dependants do you have? How is their education paid for? What debts do you have? How far along are you in your mortgage payments?
The secret is to balance between being under-insured and over-insured. Paying too much or too little money on life coverage premiums can be destructive to your general financial health. Look at insurance coverage as a replacement for your income. Calculate how much money you use on your family. Don’t simply take the whole salary; you have to deduct taxes, and other personal expenses such as memberships, food, travel and clothing. The remaining amount is the one you use on your family.
The second step is figuring out how long you need to replace the income. By design, once your dependants are financially independent, or your retirement savings start coming in, you no longer need the insurance policy. Therefore, if you are 25 years old, and you want an insurance policy that covers you for 25 years, the death benefit should be your total annual income multiplied by 25 years. However, if you can pay for a higher premium, then you should buy a plan that can cover all your family’s significant expenses such as college fees and the mortgage.
If you add everything up, it may look like too much money, but ensure that you find a balance between your insurance premium payments and taking care of other financial responsibilities. Suppose you notice that your premium payments are preventing you from taking care of other financial obligations such as paying back a personal loan. In that case, it is time to re-evaluate your cover.