A 2010 TD Insurance Risky Business Poll revealed that 31% of Canadians didn’t have life insurance.
Of those, 40% said they didn’t need it, 23% said they probably should think about getting life insurance, and 23% said they didn’t think they could afford.
1500 people were surveyed, and of the total almost a third worried they didn’t have adequate protection under their existing policy.
It’s no surprise there are such widely differing opinions of why people don’t need life insurance. Life insurance is not exactly an easy topic to broach with so many different policies, companies, and individual circumstances to take into account.
Furthermore, a 30 year old won’t approach life insurance the same way a 50 year old would, so it’s difficult to generalize about what works for some people, and doesn’t work for others.
Which is why you should consult an insurance professional – someone who’s willing to give you the facts without trying to push a policy that may not fit your particular needs.
But it certainly pays to be an educated consumer, which is why I’ve compiled a list of why you need life insurance.
1. A Hedge Against the Unknown: Donald Rumsfield famously said that there are known knowns (things we know that we know) known unknowns (things we know that we don’t know, but can come to expect) and uknown unknowns (things we don’t know exist, and can’t expect to know them until we experience them.) Life insurance takes care of the last two, and helps you protect the ones you love.
2. Income Replacement: If you’re a spouse or a parent and you support a family with your income, life insurance can protect your family from the loss of income in the event of your premature death. This is the most common reason people purchase life insurnace: if you have dependants, you want to protect them should something happen to you.
3. Debt Payment: On top of the emotional toll of your passing, debt can be an almost unbearable burden as your dependants are required to pay off your debts. If you pass away and hold outstanding debts, life insurance can pay them off. Debts can include mortgages, car payments, and credit cards.
4. Final Expenses: Why you die, there are a number of expenses that need to be covered. Life insurance can take care of these expenses, such as funeral and other administrative expenses.
5. Supplement your Retirement: Annuities put a certain amount of money into a life insurance investment product, and in return you get a guaranteed stream of income month after month.
6. Education Funding: The death of a parent sometimes means that the education of a child or the quality of that child’s education, is compromised. Insurance can mean giving a child access to good quality day care or university level education.
7. Business Continuation: If you own a business, life insurance can help with the transfer of business ownership in the event of your death – this means the insurance can provide the funds necessary to continue the business and cover any losses incurred by your death.
8. Tax Liability: Life insurance policies can cover tax liabilities in the event of your death. This means that the policy can cover government estate taxes that could otherwise reduce your heirs’ inheritance.
9. Maximize your Pension: Sometimes when you retire you are given the option to receive a higher pension in exchange for allowing the pension to stop when you pass away. With a life insurance plan, you can eliminate the need for an after-death pension, letting you to select the higher-pension option.
10. Charitable Giving: Life insurance policies can provide a way for you to make much larger gift donations than you might have thought possible – plus, if you name a charity as the beneficiary of a plan, your annual or monthly premiums are deemed as charitable donations and qualify for tax receipts.
11. Equalizing Inheritance: Life insurance can help provide funds to ensure each child receives an equal share of their parents’ assets.
12. Increase your Credit: In some cases life insurance is considered a financial asset, which can help increase your credit and assist you in getting a loan.
13. Peace of Mind: This one’s related to #1 – covering the known unknowns and unknown unknowns can be relieving, and can let you concentrate on more pressing things in life, like family, work, and play without having to worry about the uncertainties in life.
Unlike a lot of answers to life insurance questions, this one’s easy: Term Insurance is better.
Let’s start with some definitions, and remember if you ever get confused swing over to our Glossary where you can keep track of difficult words and concepts.
Term Insurance is a flexible insurance plan that lasts for a limited period of time, and that provides life insurance coverage at a fixed rate of payments.
Term insurance is the traditional form of life insurance and the one most people think of before they start researching insurance plans. (Incidentally, I just wrote a blog post for people who are just starting to think about insurance: I Don’t Have Life Insurance – Where Do I Start?)
The idea is you pay insurance for a “term” (a period of time usually between 10 and 30 years) after which coverage renews. When your term renews, coverage at the previous rate of premiums is no longer guaranteed, your new term will be at increased rates. Our clients always have the option to re apply for the cover at standard rates.
When an insured person passes away, term insurance pays the face amount of the policy to the named beneficiary tax free, which is what most people expect from an insurance company.
Whole life insurance is fairly different. Whole life insurance is a life insurance policy that exists for the insured’s entire life, and it doesn’t expire at the end of a “term.”
Whole life insurance came about in response to certain term insurance policy holders who outlived their plan’s time period and were upset about paying insurance for years with nothing to show for it.
Whole life (“permanent” or “cash value” as it’s sometimes called) is basically a way to accumulate wealth thanks to an investment component, which complements the insurance component. The idea is invest accumulated premiums in stock, bonds, or other market instruments. The policy then builds cash value, against which you can borrow money against, or you can cash in the policy and take the money out permanently.
One of the problems with whole life is that it’s expensive, since you have to pay for insurance as well as the investment portion. The idea is that the longer the policy has been active, the higher the cash value as the money earns interest and/or dividents. Keep in mind that although you’re paying higher premiums, they don’t change at all for your whole life. Term insurance on the other hand, does increase.
The downside to whole life is that management fees and commissions tend to eat into your money, and insurance companies usually invest primarily in fixed-income securities, which means that the savings investment is subject to interest rate and inflation fluctuations.
Many people, including myself, see whole life as a kind of forced savings, or forced retirement plan over which you have little control. It’s difficult to tell what your return on investment will, or even how much of your premiums are going towards the insurance, and who much towards the investment.
Plus, most insurance analysts note that whole life policies hardly ever yield a decent return unless they’re held for more than 20 years. And obviously, there are other more transparent ways of investing money at your disposal.
Here’s an example from Smartmoney that illustrates my point with a comparison between a Term Policy and a Whole Life Policy:
Say a 40-year-old nonsmoking male has a choice between a $250,000 Met Life universal policy with a $3,000 annual premium and a same amount of renewable term coverage with a 20-year fixed premium of $350.
At the end of one year, the universal policy, assuming it paid 5.7% per year, tax-deferred, would have a cash value of exactly zero (cash value is the amount you would get back if you canceled the policy).
But say he had instead invested $2,650 (the difference between $3,000 and $350) in a no-load mutual fund that averaged a total return of 10% annually.
At the end of the first year, he’d have $2,841, accounting for taxes on the earnings at a 28% rate. At the end of 10 years, he would have accumulated more than $46,000 in after-tax savings in the mutual fund.
Over the same period, the cash value of the policy would have climbed only to $31,819.
Of course this is only one scenario that fits the needs of a single 40 year old nonsmoking male – everybody’s age, health, insurance company, and insurance policy is different. Interest rates and dividend rates fluctuate too, which makes Whole Insurance more complex to analyze, and more difficult to predict as a favorable long term insurance policy.
As you can see, there are many variables when comparing Term and Whole Life insurance. As always, your best bet is to start by emailing us here at Bravia Life – we can look at your profile and then talk through the life insurance policy options that fit your unique needs.
Everyone’s different, and we’d love to help!
Researching the best life insurance in Canada can be tricky.
So let’s start with some Canadian life insurance definitions: life insurance is a type of insurance that pays money to a beneficiary when somebody (usually a family member) passes away.
That family member is usually referred to as the “policy holder” since they are the one who purchased the life insurance policy.
Typically, your first step when thinking about getting life insurance should be a question: why? This is a great starting point because it narrows down the kind of policy that’s right for you.
There are a number of common reasons for why you should get a life insurance policy:
1. Income Replacement: If you’re a spouse or a parent and you support a family with your income, life insurance can protect your family from the loss of income in the event of your premature death.
2. Payment of Debts: If you pass away and hold outstanding debts, life insurance can pay them off after you pass away. Debts can include mortgages, car payments, and credit cards.
3. Final Expenses: Why you die, there are a number of expenses that need to be covered. Life insurance can take care of these expenses, such as funeral and other administrative expenses.
4. Education Funding: The death of a parent sometimes means that the education of a child or the quality of that child’s education, is compromised. Insurance can mean giving a child access to good quality day care or university level education.
5. Business Continuation: If you own a business, life insurance can help with the transfer of business ownership in the event of your death – this means the insurance can provide the funds necessary to continue the business and cover any losses incurred by your death.
6. Tax Liability: Life insurance policies can cover tax liabilities in the event of your death. This means that the policy can cover government estate taxes that could otherwise reduce your heirs’ inheritance.
7. Charitable Giving: Life insurance policies can provide a way for you to make much larger gift donations than you might have thought possible – plus, if you name a charity as the beneficiary of a plan, your annual or monthly premiums are deemed as charitable donations and qualify for tax receipts.
8. Equalizing Inheritance: Life insurance can help provide funds to ensure each child receives an equal share of their parents’ assets.
As you can see, purchasing the right kind of life insurance can be complicated, especially when you consider that everybody’s needs are different, and these needs will change as you experience changes in your life like marriage, divorce, the birth of a child, retirement, the purchase of a house, etc
But for the purposes of getting started and keeping things simple, once you understand the “why,” the next question is always “how much?”
A good life insurance calculator like this one can help estimate what stage you’re at in life, what your cash needs are, how much you’ll pay into your policy, and how much you’ll receive out of your policy.
There are many life insurance calculators online – just make sure you’re using one from a Canadian source, since American life insurance calculators will give you inaccurate results.
Of course, once you’ve read and researched enough online, the next best step is to talk to a life insurance advisor or broker, and to shop around and compare policies.
We know that researching life insurance online can be overwhelming, so another great starting point would be to email us here at Bravia Life.
We’d be more than happy to help point you in the right direction.