Personal finance doesn’t just equate to stocks, bonds and houses. One of the most important decisions that people have to make is whether buying life insurance is necessary. Almost everyone in Canada knows about car insurance, it’s a necessity in order to drive, but when it comes to life insurance very few people know what to buy or even understand what types of insurance are available.
Life insurance is completely optional. It’s not required by law in any province across Canada and therefore it’s possible to never buy life insurance at all throughout your life. Is it a smart idea to not buy life insurance? That really depends on your situation and what stage in their life you are in. It’s hard to say whether insurance is necessary, but certainly there are some guidelines.
Why Buy Insurance?
Most people buy life insurance because they want to protect loved ones in case of a tragic accident. That’s generally the prime reason why buying life insurance is necessary. If you have dependants in your life, which means you have individuals who rely on you financially, then it’s quite possible that life insurance is something you want to consider.
Disability and Long Term Care
If you are working then there is a good chance that your employer will have disability or long term coverage already with your employee benefits. Employers want their employees to be healthy, but they too need to insure that if anything goes wrong there is coverage for the salary of the disabled worker.
Employers can’t fire you for getting injured at work or having some kind of long term illness. This is why a lot of employers will have insurance that pays a portion of the salary to the individual in case of an illness. If this is the case, then looking at buying disability or long term care insurance is a moot point. You would end up duplicating your coverage for no reason and paying extra premiums with little benefit.
It’s advised to look through your current coverage before even considering buying coverage; however, with disability and long term coverage, the payout ratio is extremely low. Also these types of coverages are severely restrictive and often times it even makes more sense to save up an emergency fund than to rely on this type of insurance coverage. It’s important to read the fine print and really understand what is covered and what is not in any disability policy that is purchased. You would be surprised at how reluctant insurance companies can be to paying out claims.
If you are self-employed and fear the loss of income due to injury this might be something worth considering. Though some people feel at ease if they have disability coverage, it’s not a necessity when considering the purchase of life insurance. The premiums will generally outweigh the benefits.
Mortgage Life Insurance
Not to be confused with CMHC mortgage insurance. That’s the wrong insurance. The CMHC insurance is not there to protect the home buyer, it’s there to protect the banks in case you default. That means that you are still on hook for the mortgage should you be unable to make money to pay for it.
The purpose of mortgage life insurance is to pay the outstanding mortgage in the case an accident should render you unable to pay it. The concept seems legitimate, but there are some quirks to some policies that makes mortgage life insurance a difficult pill to swallow.
As you continue to pay premiums over the course of the mortgage, the value of the insurance actually decreases. That’s because you are paying off your mortgage on a month to month basis. A further downside is that you will never recover any of the premiums once you finally pay off your mortgage. When the house is paid off, the insurance will expire, and you won’t have anything in return.
There are also many other terms that can make mortgage life insurance complicated. If you should re-mortgage or refinance, the insurance policy becomes void and new premiums must be applied. If you change homes, the insurance also becomes void. Since most Canadians only stay in their homes on average of about 7 years, there’s a good chance that your insurance plan will just become useless.
If there is any kind of insurance that is simple to understand, it’s term life insurance. Pick a length for the term, pick the amount to insure and then just pay the premiums. Individuals looking to purchase life insurance should just consider a standard term life insurance plan. That’s because it’s the most simplest form and there are a lot less moving variables one has to consider.
So how do you pick length of term and amount to insure? That depends on your current situation. If you have dependants that are children, then you want ensure that your kids are taken care of financially until they are able to take care of themselves. If you feel that your own personal savings after a certain amount of time to overcome any possible financial hardships then you could also do with a shorter term. These are all factors that you have to consider individually and it will vary from person to person.
How much are we worth? Well some people will say no money could possibly ever repay how much their life is worth; however, when buying insurance you don’t want to pick a ridiculous payout sum on your life because your premiums will be sky high. Choose a dollar value where it will comfortably cover you mortgage and the expected amount it will take before your dependants are able to contribute on their own.
Term insurance is great because it allows you to customize your plan to meet your needs. It’s also only needed in the worst of cases and since it’s not an investment plan the premiums are significantly cheaper. For most individuals looking for life insurance, a term insurance is the only thing to really buy.
Other Life Insurance Products
Insurance brokers of today are more and more like salespeople for their respective companies. Brokers will try to sell you on many different investment products that are disguised like insurance products. Many of these products are meant to provide you with a peace of mind, but really the essence of the products are to skim fees off the principle of your investment to fund their profits. In essence what they are selling you are no different than the mutual funds that you can get from the big banks.
What are some of these products? Annuities, Lifetime Income Benefits, Tax Shelter Plans. Though they will sound really good on paper, they are actually investment products that you can probably do better using a diversified investment portfolio with low fees. Avoid these products at all costs. Don’t fall prey to their sales tactics.
Address Your Need
The need to buy life insurance is a personal one. It depends on your current life situation and whether or not there are loved ones that you want to protect in the unfortunate case of an accident. Though the decision to purchase insurance is not clear, one thing is for certain. Stick to a standard term insurance policy if you choose to buy. It’s the simplest product to understand, the premiums are the most reasonable and the policy can be catered to your needs to give you the proper peace of mind.