Who needs life insurance?

Life insurance is not a financial requirement, but it can offer peace of mind that your family will be taken care of, financially, when you pass away.

So, should you buy it?

Like with many things, the answer is: It depends. If anyone counts on your income to make ends meet, yes, you probably should.  

Life Insurance: Why It Matters

Life insurance cannot replace you, but it can replace your income if you were to pass away. In the immediate term, the payout can help your family cover your end-of-life expenses, repay debts, and meet everyday living expenses. In the long run, insurance proceeds can pay for college tuition fees and even help your surviving spouse or partner retire comfortably.

Who needs life insurance?

You might be wondering: “Should I buy life insurance?” There’s no one-size-fits-all answer to this question as everyone’s situation and financial goals are unique. All the same, if you have people in your life who rely on you for their financial well-being, you should probably get it.

Here are a few examples of people who are a good candidate for life insurance.

1.  Breadwinners

Taking out a life insurance policy can be a smart decision if your spouse or partner relies on your income, even if you don’t have children. The insurance proceeds can help them take care of everyday living expenses, monthly installments like mortgage payments, and even save for the future.

2.  Parents

Life insurance is a must-have for couples with young children. If anything happens to you, the insurance payout can help your family stay financially afloat.  

3.  Mortgage holders

Your mortgage (and other debts) doesn’t simply disappear when you die. Which means your untimely demise might saddle your loved ones with expenses they might not have the means to cover. If you don’t want that to happen, consider buying a life insurance policy. It can act as a financial safety net for your family, providing them with the means to cover your debts.

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4.  Small business owners

Small business owners can benefit from life insurance in many ways. For instance, they can use it to get a business loan, since most lenders require life insurance policy as collateral for such loans. If you have one or more business partners, life insurance can be used for funding a buy-sell agreement to ensure smooth business continuity after a partner passes away. Having a life insurance policy also helps mitigate the financial impact of your death on your business.

5.  People with large, complex estates

Life insurance payouts are paid promptly upon insured’s death and are tax-free as long as the estate is not the beneficiary. For these reasons, it can play a vital role in estate planning.

For example, your heirs can use the life insurance coverage payout to pay for probate fees, estate taxes, and other expenses associated with the distribution of an estate.

It can also help you distribute your estate equitably among multiple heirs. If you want to pass a certain asset, like a business or home, to one child, the life insurance death benefit could be used for providing a comparable inheritance to other children.

6.  People who want to cover end-of-life expenses

If you don’t want to burden your loved ones with your end-of-life expenses, you may want to consider a final expense policy. It is a small life insurance coverage plan intended to cover these costs.

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Which types of life insurance do you need?

Life insurance policies fall into two categories: term life and permanent life insurance.

Term Life Insurance

Term life insurance is simpler to understand and cheaper than the other policy. It covers you for a limited period, like 10, 20, or 30 years. As your policy approaches the end of its term, you will have three options:

1.     Let the coverage lapse

2.     Renew the policy

3.     Convert it into permanent life insurance policy

Generally speaking, term life insurance is right fit for all those who are looking for affordable, temporary coverage. You can customize the coverage to provide protection to your family during the years when they need it most.

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Permanent Life Insurance

As the name suggests, the policy has no expiry date. It covers you for as long as you live (of course, provided premiums are paid).

Alongside lifetime protection, most permanent life insurance policies includes a savings component, called cash value. Part of your each premium payment is funneled to the built-in savings account. Your policy’s cash value grows on a tax-deferred basis, meaning you will pay tax on interest or investment gains only when you access the funds. As a policyholder, you can access the cash value at any time and for any purpose.

The two most common types of permanent life insurance are whole life insurance policy and universal life insurance policy. Both the universal life insurance policy and the whole life insurance policy combine lifelong coverage with a savings element, but they grow cash value differently.

Even though permanent life insurance can be 10-15 times more expensive than term life, it can be a better choice in certain situations. You may want to consider it if:

• You have a lifelong dependent‍
• You are a high-net-worth individual and have already exhausted traditional retirement savings vehicles, like the RRSP
• You are a business owner and want life insurance to secure a business loan or fund a buy-sell agreement
• You want to leave a financial legacy‍
• You want to use life insurance for estate planning purposes

How Much Life Insurance Do You Need?

Now that we have seen who needs life insurance and which type of life insurance is a right fit in which situation, let’s look at three simple ways to calculate the life insurance you need, from universal life insurance to term life insurance.

1.  Multiply your annual salary by 10

Most financial planners recommend that the sum assured should be at least 10 times the insured’s salary. So if you make $70,000 a year, you’re looking at a $700,000 death benefit.

2.  Multiply your income by 10 and add $100,000 per child

This method adds another layer to the “10 times annual income” rule by ensuring the death benefit covers the cost of education.

3.  The DIME formula

This approach takes into account debt, income, mortgage, and education costs. Basically, you add final expenses in each of these categories to find out your target coverage amount.

• ‍Debt – Add up all your debts, except mortgage debts ‍
• Income – Multiply your annual income with the number of years your family will need financial support after your death‍
• Mortgage – Your current mortgage balance‍
• Education – Estimate how much it will cost to send your children to school and college

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Conclusion

If people in your life depend on you financially, you probably need life insurance. The insurance payout can help your family meet living expenses, pay down the mortgage, and take care of big expenses down the line, like college fees.

The general rule of thumb is to have a death benefit that’s at least 10 times your annual salary, but you may need more if you have young children, a large family, or special circumstances. For most people, term life insurance is a better choice since it provides a pure risk cover for very affordable premiums. However, in some situations, a permanent life insurance can be a better option, despite its high price tag.

Not sure exactly how much coverage your family would need? Or whether you should buy term life or whole life?

Just contact a Dundas Life insurance advisor. They will take the time to understand your financial goals, listen to your concerns, and explain the pros and cons of different options so that you have a clear idea before you decided to buy life insurance.

Frequently Asked Questions (FAQs)

Is life insurance necessary if I'm single and have no dependents?

Generally speaking, life insurance is less valuable for singles than it is for those who are married and have kids. All the same, there are many situations in which singles can benefit from having life insurance. For instance, you may want to consider buying coverage if you don’t want to burden your loved ones with your end-of-life final expenses. Life insurance can also be an option for singles who want to leave a financial legacy to loved ones or give to charity after they die.  

Does age affect life insurance premiums?

Yes, it does. Life insurance rates increase with age. This is because your risk of death increases as you become older. On average, life insurance premiums go up by 8% - 10% every year you get older. If you need life insurance, do not put off buying it until later in life. Purchasing a policy early in life allows you to save money on premiums, since rates remain the same throughout the policy’s duration.  

Can I get life insurance if I have a pre-existing medical condition?

Yes, you can get life insurance with a pre-existing medical condition. But you will likely pay more for coverage. Sometimes, a pre-existing condition may limit your options.

For example, life insurers usually are reluctant to write a fully-underwritten policy to someone with a cancer diagnoses, unless their cancer has been in remission for at least five years. However, such applicants will have no problem getting a guaranteed issue policy or a policy with a graded death benefit.

Can I have more than one life insurance policy?

Yes, you can have multiple life insurance policies. Life insurers are more concerned about the total amount of coverage you have than about the number of policies you own. As a general rule, your coverage cannot exceed 20-30 times your annual salary.

In many situations, having multiple life insurance policies, each with a different expiration date, is a better option than buying one large policy. This strategy, referred as laddering, ensures that at every stage of life you only pay for the coverage you need at that time.

What happens if I stop paying my life insurance premiums?

If you do not pay life insurance premiums, your policy would lapse after the grace period. A grace period is a small window of time — usually up to 30 or 31 days— you get after the due date to pay the premium and avoid a policy lapse.

If you have a permanent life policy with a cash value feature, the insurer may use the policy’s cash value to cover premium payments until it runs out.