Being an adult comes with a host of expenses that you can’t avoid, like food and shelter. Far too many people wince at adding the cost of insurance to their list of fixed expenses. But, life insurance is not a variable expense. It is the best way to ensure financial security for yourself and/or your family in the event of an unexpected life event.
If you have an income, and you have assets of any kind, you need insurance. And if you have a family, life insurance is a necessity to protect them in case something happens to you.
What Is Insurance And How Does It Work?
Insurance is a deal you make with a company. And if you need it, your coverage covers the cost of illness, damage or losses. In exchange, you pay an annual premium, often over 12 months.
The second you start a family, consider getting life insurance. But not just when, or if, you have kids. It’s important to protect you and your spouse in case something happens to either one of you. Consider the financial burden of planning a funeral and burial. Or, time off work to emotionally recover from a tragedy. In addition, there is the ongoing cost of living without the benefit of your spouse’s income.
Life insurance is the best way to make sure a tragic loss isn’t compounded by crippling financial responsibilities.
Is Life Insurance Worth Getting?
You pay insurance premiums as a way to manage risk. You can’t control what happens in life. But you can certainly help protect yourself in case something does happen. The type of insurance you need depends on your life situation. That includes where you live and where you work. In addition, it depends on what you drive and own. So, make sure any assets you have, including your life, are protected by insurance.
If you have children or a spouse, life insurance protects them if something happens to you. To clarify, if anyone in your immediate family suffers financially by your loss, insurance protects them from that hardship.
How Do I Get Insurance?
It’s hard to know which type of life insurance suits your needs. Therefore, it’s best to enlist the help of someone to help guide you. Professionals provide advice and guidance on policies and coverage to help you decide what’s best for you and your family.
Financial Advisors take a holistic view of your finances, your lifestyle and your goals. Then, they recommend how to best manage and plan those finances. And based on their generalized focus and knowledge of insurance products, they recommend policies and coverage that make the most sense for you.
Insurance Brokers work with you to review your life situation and provide guidance on the types and levels of insurance to best meet your needs. They are well-versed in the different types of insurance. Therefore, this helps them make sound and educated recommendations. This ensures proper coverage if you or your family make a claim.
An Insurance Agent works for a specific company. They are very well-versed in all of the products and services their company offers. And this means they can provide guidance on the services that best benefit you and your insurance needs.
What is Covered in Life Insurance?
When a policyholder dies, life insurance covers the following:
Daily expenses/Income replacement – The purpose of life insurance is to offset income lost due to the death of the policyholder. It ensures surviving family members maintain the same standard of living. If you’re unsure how much you need to sustain your standard of living, try an income replacement calculator. It shows the financial impact to dependents in the event of a death to the household’s breadwinner. Here are a few considerations:
- Debts owing (including mortgage debt)
- Childcare (including daycare and, down the line, tuition for post-secondary education)
- Estate planning (coverage for capital gains, if necessary)
The following formulas calculate replacement income:
Loans and debt owed – Any outstanding debts owing under your name are settled by your life insurance policy, rather than drawing from the estate of the deceased.
End of life expenses – Funerals are costly. One of the major benefits of life insurance is that it covers funeral expenses.
What Are the Types of Life Insurance?
Term Life Insurance
Your benefit pays out if the insured person passes away within a pre-decided period of time (a term of 10 years or 20 years is typical), or before a certain age. And in the event of a death, the term life insurance policy pays out to the beneficiary.
This type of policy tends to be more affordable than permanent insurance. But, expect a health exam. That’s because an adjuster considers your overall health to determine your premiums.
This type of insurance is, as it sounds, in effect for the entirety of your life until you die. Once you die, your beneficiary receives a lump-sum payment. Unlike term-life insurance, permanent insurance accrues cash value that you can cash out if you cancel your policy. Because of the nature of this policy, premiums are high. And while the coverage is for your entire life, it is based on the status of your health when you sign up.
However, you don’t have to take another physical until 10 years down the line when your health might not be as good. Because of this, you pay a set payment for the remainder of your life. And you don’t have to worry about getting hit with a new, significantly higher premium down the line.
Whole Life Insurance
Whole life insurance is a type of permanent insurance. With this type of insurance, your premium is set for the remainder of your life. And there is likely a minimum cash payout amount. The cash value of this policy makes it desirable. And that cash builds up, tax-free. It makes up a portion of your premiums, as does the interest you pay to the insurance company. And because you accrue money with this type of insurance, it functions as both a savings tool for you and a benefit for your beneficiary upon your death.
Participating life insurance combines whole life insurance and the opportunity to grow your wealth, tax-free. This type of insurance is similar to a mutual fund. It is able to accrue interest. You pay the premiums for the entirety of your life. And any overage from that premium is invested in an account. At the end of each year, the performance of that investment pays out in dividends to the account holders. Account performance, taxes, expenses and death benefits determine the value and payout.
This type of insurance offers investment opportunities along with an insurance policy. So, it’s a bit of a two-for-one-deal. Because of the insurance component of the policy, the benefit and value of the policy changes with market shifts – for better or for worse. In addition, because there is an investment component to this type of insurance, policyholders select types of investments. And, you choose your premium to determine what goes toward insurance (after you pay towards the policy premiums). The investments accrue tax-free. And you can choose to withdraw funds from those investments, but there are tax implications on withdrawals.
What is Not Covered in Life Insurance?
Life insurance covers much of your beneficiary’s debt and living expenses if you die. But there are things that your insurance does not cover.
While you can use a payout to pay off a mortgage, your life insurance policy is not specifically mortgage insurance. So if you don’t otherwise have mortgage insurance, make sure your life insurance policy includes enough coverage to pay off this debt.
Pre-Existing Medical Conditions
Your life insurance policy often requires a medical exam to determine your current health. It addition, it determines ongoing and future health risks and concerns. Therefore, certain medical conditions may exclude you from benefiting from a life insurance payout.
Disability or Illness
Life insurance only pays out when there is a loss of life. Loss of income due to disability or illness requires a different type of insurance to offset expenses. To clarify, life insurance policies do not apply in the event of illness or injury.
How Is Life Insurance Taxed?
In Canada, beneficiaries typically receive their pay out, tax-exempt. Regardless of the size of the policy, it is not considered income. The exception to this rule is if there is a cash component to the policy that is in addition to the pay-out amount. If investments and savings are a part of your policy, you may be subject to tax when it accessed. When there is earned interest, your beneficiary fills out a T5 form by the Canadian government.
Where Can I Get Life Insurance?
In Canada, there are many insurance companies to choose from. Some of the larger insurers are:
Why Would a Life Insurance Claim be Denied?
If your policy does not accurately reflect and take into account known health risks, and your death is somehow related to that condition, your policy is null and void. Therefore, be honest when applying for life insurance. You don’t want to pay into a policy your beneficiary can’t benefit from because of dishonesty. For example, if you say you are a non-smoker, and you die of a smoking-related illness, your policy might not pay out. Honesty is truly the best policy when it comes to life insurance.
What Kind of Deaths Are Covered in Life Insurance?
As it turns out, and contrary to what many people think, your life insurance coverage applies no matter how you die.
That applies even if you are in the process of committing a crime, or base jumping, parachuting, overdosing on drugs or driving drunk. Even if you take your own life, your insurance pays out. Pretty much the only exception is if your beneficiary kills you.
So while you never know if you will fall ill or get injured, rendering you unable to earn an income, you do know you’re going to pass away. There’s no avoiding it. And having a solid life insurance policy in place helps protect your assets and your loved ones when the time comes. Not sure what kind of coverage you need, or how to set up a policy? Speak with a financial professional to get the ball rolling. Don’t leave it until it’s too late.
How Much Life Insurance Do I Need?
How much insurance you need depends on which assets you want to protect. A general rule of thumb is 10 times your annual income. So if you make $80,000 a year, consider coverage of $800,000. However, you may need more coverage depending on other factors in your life. This is where talking to a professional can help you make an educated decision.
Can Life Insurance Cover Funeral Costs?
When you receive a life insurance payout, those funds are yours to use however you see fit. This includes paying for funeral expenses. However, there are insurance policies that specifically cover funeral expenses. For example, funeral insurance covers burial or cremation. It also covers other associated costs. Speak to a broker to learn more about the benefit of having funeral-specific insurance.
How Much Does Life Insurance Cost In Canada?
There are a lot of factors that determine your life insurance costs. And what an average Canadian pays may not necessarily reflect what you can expect to pay. That being said, on average, the typical Canadian spends just shy of $60 a month, translating to about $700 a year on term life insurance.
How Is The Cost Of Life Insurance Determined?
Adjusters consider a number of factors when determining your life insurance costs. Some things, like your health, might not be a surprise. But there are other factors insurance companies consider that you might not realize.
Life insurance adjusters consider your:
- Current age
- Current health
- Health history
- Family health history
- Occupational hazards
- Tobacco use
- Alcohol use
- Mental health
- Driving record
- Hobbies (dangerous hobbies will increase risk)
- Foreign travel
- Credit history
- Criminal history
- Size of benefit
- Length of term
- Type of insurance
- Marital status
- Healthy lifestyle
Therefore, the way you live your life, the choices you make on a day-to-day basis, as well as past choices, all impact your insurance. Ultimately, adjusters hedge their bets on how likely you are to cash in and why. For example, if you smoke and bungee jump, and have a bad driving abstract, your life insurance premiums are much higher than a non-smoking, non-adventure seeker.
In other words, being healthy and safe are the best ways to mitigate your life insurance costs. For example, did you know that if you smoke, your life insurance premiums are twice that of a non-smoker? So, if you need a reason to quit smoking, aside from the health benefits, think about the cost of your life insurance.
Who Should I Name As My Beneficiary?
You can name anyone as your beneficiary. Married and common-law couples typically name a spouse. You can also name your children. If, however, you aren’t married, consider close friends or family members. Perhaps there is someone in your family with special needs who would benefit from an infusion of funds. Just make sure you don’t make the mistake of not naming anyone. Because if you fail to name a beneficiary, your estate absorbs the benefit and is taxed accordingly.