Answering a few commonly asked questions.
When it comes to planning for the future, there’s a lot to think about, and one important element involves support for loved ones. Financial security is a big part of that support, and that’s where life insurance can help. However, this big topic can feel complicated, leaving many people unsure of how to get started. The best advice is to set up a meeting with your advisor, who can walk you through all the different types of life insurance plans and help you decide what makes sense for your situation. This handy guide can also help you get up to speed on some of the basics.
Why do I need life insurance?
The purpose of having life insurance is to prevent financial hardship. There can be great comfort in knowing that your spouse, children, parents and other family will have the financial security they need. Losing a loved one is so incredibly painful – imagine how your family would cope if suddenly you were no longer there. Life insurance can help your family carry on without the added strain of financial worries. Loss of income can have serious consequences, affecting the ability to stay in the family home, support post-secondary education and even cover essential monthly bills and groceries.
It might feel as if there’s plenty of time to figure out your life insurance, but sometimes life can turn on a dime. If you think you can’t afford coverage, your advisor can help explain the best options for your situation at a price that fits your budget.
The best thing you can do is start the conversation – you might be surprised at how easy the process can be.
How much coverage do I need?
Figuring out expenses, budgets and the right amount of coverage might feel like an overwhelming task, but this is where your advisor can help guide the process. There are also free online life insurance calculators that can help you complete this task in minutes.
As a general rule of thumb, having enough insurance to cover up to 10 times your annual salary is considered an appropriate benchmark. So, an annual salary of $75,000 would translate into a policy worth about $750,000. If 10 times your annual salary feels like a bigger policy than you want, examine your monthly expenses and any outstanding debt. Then factor in future education costs for children, cost of living increases that your family may have to contend with, and how much you ultimately want your designated loved ones to inherit.
What are the different types of life insurance?
Because every person has unique needs, different types of insurance exist to serve different purposes. To simplify the process, think of these three buckets when it comes to life insurance options:
- Term life
- Whole life
- Universal life
Term life insurance is considered temporary insurance, providing protection for a set period that you choose. You might want coverage for the next 10 years, or maybe until you turn 65. Term life can be a great option when you want coverage in place until your children are grown up or until the mortgage is paid off. The application process also tends to be simple and straightforward, with lower premiums (payments) to start. Your monthly premiums will be based on your age and health. Depending on your needs, a term life policy can be extended or renewed for further set periods.
Whole life insurance is considered permanent insurance, providing ongoing protection for as long as premiums are paid. This type of policy costs a bit more, but premiums don’t increase as long as the scheduled payments are being made. A whole life policy offers both a guaranteed cash value and a death benefit. The cash value continues to grow as long as the policy is active, and that cash amount can be accessed by the policyholder. The death benefit is a tax-free payment to designated beneficiaries, which can help to pass wealth on to the next generation or cover tax liabilities at death. Some whole life policies receive a credit or dividend every year. These policies have the potential to grow the death benefit and cash values beyond the guaranteed values.
Universal life insurance is also considered permanent insurance, while offering more flexibility than whole life insurance, as well as some investment options. Coverage stays in place while premiums are paid and there is potential to accumulate some cash value if desired. Cash can be withdrawn from the policy, but withdrawals affect the amount paid out to beneficiaries as a death benefit later on. The deposits you make into the policy are placed into an investment account of your choice. Your advisor can go into greater detail on what investment options are available.
Do I need living benefits insurance?
Living benefits insurance is separate from life insurance but it’s an important additional layer of protection that you’ll want to discuss with your advisor. Under the living benefits umbrella are two types of coverage: critical illness insurance and disability insurance. Plans are also available that combine life insurance, critical illness and disability in one. Here’s a breakdown of these two types of extended insurance coverage.
Critical illness insurance pays a tax-free lump sum if you’re diagnosed with an illness or condition that’s covered by your policy. The benefit can be used as you wish to help finance health care treatments, cover household and family-related costs, manage business expenses and protect what you have set aside for your retirement, so that you can focus on recovery.
Disability insurance protects your income if you are unable to work because of physical or mental health disabilities. Regular payments are based on a percentage of your salary at the time a claim is made. If you are a business owner, disability insurance can also cover business expenses and fund a buyout agreement if necessary.
What is behavioural insurance?
Behavioural insurance is the latest innovation in life insurance that rewards you for making positive lifestyle decisions. You can earn points that could entitle you to various rewards and discounts on gym memberships, hotel stays, fitness trackers and more. This type of program is included with some life insurance policies and may offer discounts on policy premiums thanks to the good choices you make.
Think of life insurance as an important element in creating a solid foundation for your overall plan. Since every family is unique, your advisor can help you develop a coverage plan that will perfectly suit your needs. For more information about life insurance, check out this section of Solutions magazine.
,3 The cash value grows on a tax-deferred basis and taxes are due on withdrawn amounts.
 Beneficiary is the term used for the person, people or legal entity named in a life insurance policy to receive the death benefit.