When Should I Buy Life Insurance?

Life insurance is not the most exciting discussion topic. And the process of purchasing it can at times be confusing. However, like death and taxes, it is something you simply cannot ignore.

Are you one of them? If so, this post is just for you.

Why you need a life insurance policy

Life insurance can keep your family afloat if you pass away prematurely. While your loved ones will miss you, a life insurance policy can ensure they are not put at a disadvantage by the loss of your income.

What is term life insurance?

Term life insurance is the simplest, purest, and often the cheapest form of life insurance. It provides protection for a specified number of years, like 10, 20, and 30 years, or until you reach a specific age, like 65.

The insurer pays a death benefit to your beneficiaries if you die during the policy term. Term life insurance is designed to replace your income when you’re gone, so your loved ones can cover expenses, like mortgage payments, education costs, and everyday expenses.

Term life insurance is much cheaper than a comparable whole life insurance policy since it has only one goal: paying a death benefit. It doesn’t include many bells and whistles, like a built-in tax-deferred savings account, which will only increase your premiums.

Most term life insurance policies have level premiums, meaning they are guaranteed to remain unchanged throughout the term. As your policy approaches the end of its term, you have the option to renew coverage without submitting proof of insurability.

Do I need term life insurance?

If someone depends on you financially — a spouse or children — you probably need life insurance to secure their future. But that doesn’t mean life insurance is only for those who have financial dependents. For instance, if you are single but don’t want to burden your loved ones with the cost of your funeral, a life insurance policy can be right for you.

Our insurance calculator can help you easily figure out the answer to the all-important question — should I get life insurance? It will take into account your personal details, like age, family, and income, and offer a personalized recommendation.

Another useful way to check if term life insurance makes sense for you is to ask specific questions, like the following:

Does my spouse or partner rely on my income?

If your spouse relies on you financially, or if you are the primary breadwinner, the loss of your income can be devastating. Term life insurance can help your partner live comfortably after you’re no longer there. So if you have people depending on you for their well-being, the answer to the question do I need life insurance is yes.

Will my spouse be able to provide for children on their own?

Even if your partner is working full-time, running a two-income household on one income can be a huge challenge. Childcare costs and other everyday expenses add up quickly. Plus, money needs to be saved for children’s college education.

Your spouse may not be able to manage everything on their salary alone. This is where life insurance can come in. The payout from your life insurance policy will help your family stay afloat if you pass away unexpectedly.

Did I recently make a big financial purchase, like buying a home?

If yes, you need term life insurance. Your mortgage doesn’t die with you; instead, it will get passed on to your family or your estate. Your loved ones will grieve your death, but term life insurance can ensure they don’t suffer financial stress after you’re gone. Buying a term life policy for at least the amount of your mortgage will help your family pay it off after your death and avoid foreclosure.

Do you have debts (like a car loan, credit card bills, a student loan, etc.)?

Even if you don’t have a mortgage, consider getting a term life insurance policy to pay off your other debts at your death. As said before, your debts don’t disappear when you die. If someone cosigned your loan, that person will inherit the loan upon your death. Otherwise, unpaid debt will get deducted from your estate. Term life insurance can ensure your loved ones won’t have to worry about any debt that you may leave behind.

A good rule of thumb is to purchase a term policy that lasts at least as long as the length of your largest debt.

Would my funeral be a financial burden on my loved ones?

The cost of a funeral can run into several thousand. Research shows the average cost for burial in Canada is between $5,000 and $10,000. Depending on your personal preferences, culture, and values, it could cost even more. Life insurance can be a tool to make death easier for your loved ones, at least financially.

Your loved ones can use the proceeds from your policy to pay for the funeral. If you don’t want to burden them with the cost after you’re gone, consider life insurance, regardless of whether you have dependents or not.

Would my business fail if I were to pass away?

Life insurance can protect your business and employees from unexpected costs and debts if you pass away before you expect to.

When should I buy a life insurance policy?

While most people understand how important life insurance is, they might not always know the answer to the question — when should I get life insurance?

The answer is simple. You need life insurance when someone depends on you financially.

So if you are twenty-something and were recently married, you likely need life insurance.

If you have someone depending on their income, the earlier in life you buy life insurance, the better. That’s because life insurance gets more expensive as you get older.

Life insurance companies reward young and healthy people with lower premiums. So buying early could pay off in the long run since term life insurance policies have level premiums. That basically means your monthly premiums will remain the same throughout the term. So if you are in your 20s and buy a 30-year term policy, you’ll be able to lock in a low rate for the next 30 years.

(20-year term, preferred health class, male non-smoker.)

Another reason for buying term life insurance early is a feature called guaranteed renewability. It protects your right to renew your policy, regardless of any change in your health.

For instance, let’s say you bought a 20-year term policy when you were 30 years of age and in good health. Over the years, your health has deteriorated, and presently you’re taking medication for diabetes and hypertension. Now that the policy is approaching its expiry date, you are worried that the insurer will refuse renewal or bump up your rates significantly.

Well, you can relax because neither will happen, thanks to the guaranteed renewability feature.

Your insurer can’t refuse a renewal. Nor can they factor in any change in your health since you first bought the policy while calculating your renewal rates. Of course, your renewal premiums will be higher than before, but that increase will be based solely on age.

On the other hand, if you shop for a new term life policy as a 55-year-old with diabetes and hypertension, you’ll get classified as high-risk. In the worst-case scenario, you may get turned down. And if you get coverage, you’re likely to pay a much higher premium than you would have paid if you had bought the policy at the age of 30.

In short, the answer to the question of when to get life insurance is as early as possible.

Do I Need Life Insurance if I have coverage through work?

Signing up for an employer-sponsored life insurance plan is a no-brainer. But relying on it as your only coverage can be a mistake.

Why buy life insurance when I already have a group life policy?

Well, we’ll give you not one but three reasons.

• Group life plans have small death benefits

Typically, the payout is one or two times your annual salary. That is likely to be not sufficient to support your family for several years, pay off the mortgage, and cover your children’s education costs.

• Group life policies are one-size-fits-all

Your family is unique — so are its financial needs. The problem with group life insurance plans is that you can’t tweak them to meet your specific needs.

• You can’t always bring the coverage with you

Group life insurance plans are not always portable. You may lose coverage if you leave your job. That may not be a big deal if you change jobs while you are young and healthy. However, if you do that, say, 10 or 15 years down the line, you could find yourself in a tricky spot. Life insurance becomes harder and costlier to obtain as we get older. Therefore, pairing a group life insurance policy with an individual life insurance plan is always a good idea.

How much life insurance do I need?

If people in your life depend on you financially, you probably need life insurance to secure their future. But how much life insurance do you actually need?

The answer depends on your family’s needs and your financial situation. You can come to a ballpark figure by taking into account the following:

• Your current debt. If you plan to take a loan in the future, like a mortgage, consider that too.
• College education fees. If your spouse is a homemaker, consider the cost of the services they provide for free if after your death they are likely to work full-time.
• Your current income and the number of years for which your family would need financial support.
• Your current savings.

To get a rough estimate, multiply your annual income by the number of years your family will require financial support. Next, add your current financial assets to this number. Now, deduct all your expenses (your current debt, future loans, and college tuition fees) to get a ballpark figure.

Annual Income x Years your family will require financial support + Current assets - Any expenses = Coverage amount requirement

For example: Let's say your annual income is $60,000 and your family is going to need 10 years of support. Also, you have a car that's worth $15,000 and your annual expenses are $50,000.

$60,000 x 10 + $15,000 - 50,000 = $565,000 (Coverage amount requirement)

Of course, you don’t have to crunch numbers if you don’t want to. Our insurance calculator will do all that for you! Simply provide a few basic details and it will show you exactly how much coverage you need.  

What types of life insurance do I need?

First things first, life insurance is of two types: term life insurance and permanent life insurance. Term life insurance offers protection for a limited period. Permanent life, by contrast, provides coverage for a lifetime. It also often includes a savings component that builds cash value on a tax-deferred basis. Term life insurance is significantly cheaper than permanent since it comes with an end date and doesn’t build cash value.  

The easiest way to answer the question of whether you need term or permanent life insurance is to ask yourself the following two questions:

• Do my financial needs have an expiry date?

In other words, are your financial needs time-bound? If yes, term life insurance may be a better fit for you.

If you want life insurance until you retire, your children start earning, or the mortgage gets paid off, consider term life insurance. By contrast, if you have a lifelong dependent who will need care after you’re gone, permanent life insurance makes sense for you.

• Do I want my life insurance policy to double as an investment tool?

If so, permanent life insurance may be right for you. Remember, these policies generate lower returns than most other investment vehicles. You should buy a permanent life insurance policy for investment only if you have maxed out other investment options.

Will my premiums increase or decrease over time?

Most life insurance policies have level premiums. That means your premiums will neither increase nor decrease throughout the term of your contract.

However, in the case of term life insurance, your premiums will increase at each renewal based on your age. Also, there’s a subset of permanent life insurance — universal life insurance — that lets you increase or decrease premiums within a set range.  

How much does life insurance cost?

The cost of life insurance is unique to the insured. Age, health, smoking status, and gender can all impact your rates. Generally speaking:

• Life insurance costs increase as you grow older
• Smokers pay three to five times more than non-smokers
• You will pay more for coverage if you have a medical condition, like diabetes
• Females pay lower premiums than men

What you pay for coverage also depends on the specifics of your policy. A term life insurance policy is less expensive than a comparable permanent life policy. In the case of term life, the longer the term, the more expensive the policy will be. The amount of death benefit also impacts the cost. The larger the payout, the higher the premiums.

Conclusion

So, do you need life insurance? If someone relies on you financially, buying life insurance is a good idea. A life insurance policy can give you peace of mind in knowing your loved ones will be able to live comfortably if the unthinkable happens. At Dundas Life, we can help you find the coverage your family needs at a price you can afford.