Shopping for the right life insurance policy can feel confusing, particularly when you do not have all the facts. Many people shy away from putting a plan in place, thinking life insurance is costly or smokers cannot qualify. But neither of these assumptions are true.
In this post, we debunk the 10 most common life insurance myths so that you can find a policy that is perfect for you.
Myth #1: I do not need life insurance because I am young
Life insurance has got nothing to do with age. If you have dependents or debts that others will inherit, you need life insurance.
And when you think of it, buying life insurance early makes a lot of financial sense. Life insurance providers reserve the best rates for applicants who are young and healthy. So, purchasing a policy at a younger age allows you to lock-in affordable rates for decades or your entire life. This, in turn, reduces the total amount you will pay for coverage over time.
Even if you are young, you will benefit from investing in life insurance if:
You are married or planning to get married
A life insurance policy can help replace part or all of your income. The payout can act as a financial safety net for your spouse, helping them to cover funeral expenses and living expenses. So, if you are married or planning to tie the knot, life insurance is a must-have.
If you have children, that is all the more reason to take out a policy. The policy’s proceeds can help your young family stay afloat and even fund your children’s college education.
You are taking care of a parent or an aging relative
Many Canadians help financially support their parents, grandparents, or close relatives. If you have someone in your life who depends on you financially, buying life insurance may be a good idea. You can name your dependents as the beneficiaries, and if the worst happens, the payout can help them to pay for healthcare and other expenses.
You have a family history of certain illnesses
Do your parents have diabetes, cardiovascular disease or any other heritable health illnesses? If your family medical history puts you at increased risk of developing certain health conditions in your 40s or 50s, get life insurance now — while you are still young and healthy. If you develop any of these conditions, life insurance will become far more expensive.
Myth #2: Life insurance is unnecessary because I do not have dependents
Life insurance is almost always a must-have if you are a parent, but that does not mean singles without dependents do not ever need it. If any of these statements ring true, you are a good candidate for life insurance.
You have a student loan
Your student loan might not disappear when you pass away. While federal student loans are written off when the borrower dies, private loans usually are not. If you pass away without paying off your private student loan, the creditor can go after your co-signer.
If you do not want your co-signer to have to pay the debt, buy life insurance. Term life insurance works best in these situations because it can cover you for exactly the duration of your student loan and the loan amount.
You have a mortgage
If you have taken out a mortgage, buying a life insurance to cover it is a sound strategy, especially when a loved one is a co-signer. In the unfortunate event of your death, your beneficiary can use the policy’s proceeds to pay off the mortgage balance. This, in turn, will ensure the money paid into the home loan will benefit someone you love.
You run a business in partnership with others
The death of an owner can financially set back a small business. However, with the help of a life insurance payout, surviving partners can see the enterprise through a tough time. A life insurance policy can also help the surviving business partners to buy the deceased’s share from their heirs.
You want to cover end-of-life expenses
Even though you are single, financially independent, and never plan to get married, putting a small life insurance policy in place makes sense. Otherwise, if the unthinkable happens, a friend or relative may have to pay for your funeral and other end-of-life expenses out-of-pocket.
A $15,000 to $30,000 policy is likely to prove enough for this purpose. And it is a good way to protect your loved ones from shouldering your end-of-life expenses.
You want to leave a charitable legacy
Want to leave a donation to a charity? Consider taking out a life insurance policy and naming the charitable organization you have in mind as the beneficiary. Permanent life insurance is the best option for leaving a legacy because it always pays out, as long as the policy is in force when you die.
Myth #3: The amount of coverage I have through my job is enough
Many Canadian employers offer their employees life insurance for free or at reduced rates. However, group policies usually have smaller death benefits — one or two times your salary. If you have dependents, that is not likely to be enough. How much life insurance you need depends on your unique situation, but most experts recommend having at least 10 times your annual salary.
Inadequate coverage is not the only issue here, though. The other problem is portability. If you were to lose or leave your job, chances are your group life insurance would end. You may find yourself in a difficult situation if either of the scenarios plays out and your health is not what it used to be.
Underlying health problems can bump up your life insurance rates considerably. Worse, they can even prevent you from qualifying for a policy with a sizeable death benefit.
For these reasons, life insurance through work, while a good perk to have, is not a replacement for individual life insurance. You should always use it to supplement your individual policy.
Myth #4: Life insurance is always expensive
Most Canadians realize life insurance is essential, but many do not buy it thinking it is expensive. This is not the case, though. Life insurance for young and healthy people can be really cheap. For example, the cost of life insurance for a healthy person in their 20s or early 30s can be as low as a cup of coffee a day!
If you are on a budget, consider term life insurance. It offers the most affordable way to secure your family’s financial future. Term life plans provide coverage for a specific period, say 10 or 20 years, and can be six to 10 times cheaper than permanent life insurance.
Other things that you can do to cut down your life insurance premiums are:
No single provider offers the best rates to all applicants. So, if you want the best value, shop around. Grab at least 5-7 quotes before signing up.
You cannot stop the clock, but you can keep yourself in good shape. Healthy living, losing weight, and controlling your blood pressure and sugar levels can help cut down your insurance cost.
Smoking and good health do not go hand in hand. So, it will come as no surprise that smokers usually pay a hefty price for coverage. The good news is that staying smoke-free for just 12 months can help lower your premiums.
Re-qualify instead of renewing
Term life insurance, comes with an end date. Most providers let policyholders renew their term policy without taking a medical exam, but there is a catch. Renewal premiums are exorbitantly high. If you are in reasonably good health, you are likely to get better rates elsewhere.
Combine your spouse’s and your policy into a joint policy
Both you and your spouse need life insurance, even if one is a homemaker. If cost is an issue, consider a joint plan instead of taking out two separate policies. Joint life insurance covers the lives of two people and is usually considerably cheaper than buying two individual plans.
Opt for a fully medically underwritten policy
A life insurance policy allows you to transfer the financial risk of your death to the provider. For the contract to make sense for the insurer, they must be able to accurately assess your life expectancy.
That is why life insurance companies usually ask applicants to take a medical exam and answer a few health questions. The gathered information allows them to predict with reasonable accuracy your life expectancy and, consequently, determine the right premium rate.
While some policies let you skip a medical exam, these policies usually come with a hefty price tag. Unless you are young and healthy, you can save hundreds of dollars in premiums over time (if not more) by buying a fully medically underwritten policy.
Pay life insurance premiums annually
Life insurance premiums are usually paid on a monthly or yearly basis. The latter option, however, usually is cheaper. Most Canadian life insurers offer a discount (up to 5%) for paying premiums annually.
Myth #5: If you smoke or have medical conditions you cannot get life insurance
Smokers can get life insurance, but they will have to cough up more (excuse the pun) for coverage.
How much more?
Life insurers usually offer smokers a premium rate that is two to five times the non-smoking rate. However, most life insurers are willing to lower your premium if you can prove you have been smoke-free for one full year.
People with medical conditions are also eligible for life insurance, though they will likely pay higher premiums. The more severe your medical condition, the higher the life insurance cost.
Some medical conditions, however, can make it hard to qualify for a traditional policy. If you find yourself in such a situation, consider a guaranteed issue policy.
Guaranteed issue life insurance involves neither a medical exam nor health questions. The downside is that these policies have lower payouts, usually just enough to cover funeral and end-of-life expenses. That said, some life insurance is better than none.
Myth #6: Life insurance will not cover COVID-19
If you already have a life insurance policy, your beneficiaries will receive the death benefit if you die from Covid-19. Your insurer cannot reject the claim because you had the Covid-19 vaccine.
If you have Covid-19 and are applying for a new policy, the insurer might delay the application process until you have fully recovered.
Myth #7: The only purpose of life insurance is the death benefit
Most people buy life insurance to secure the financial future of their dependents, there is no denying it. But that does not mean life insurance cannot serve other purposes. For example: cash value life insurance.
These policies include an investment component — called cash value — which grows over time. A policyholder can tap into the policy’s cash value at anytime and for any purpose. For instance, you can use the cash value to make a down payment on your new home or fund your retirement.
You can also add certain riders to receive a portion of the death benefit while you are still living. For example, an accelerated benefit rider allows you to receive a part of the policy’s proceeds early if you receive a terminal illness diagnosis.
Myth #8: Life insurance is most useful to cover funeral costs
The proceeds from your policy can certainly help your family cover your funeral and end-of-life costs. However, that is not the primary reason why most people get life insurance.
Life insurance is useful for many things. For example, if you are married with kids, it can act as an income replacement tool for your surviving spouse. And if you have a house loan as well, the policy can serve a dual purpose — replace your income and cover the debts after you are gone.
Many people also use life insurance as an investment tool, taking out a cash value policy early in life to fund their retirement. Life insurance can also be used to make a charitable donation. You can take out a policy and name a charity as your beneficiary to help out the cause that is most important to you.
Myth #9: It is always better to invest money than to get life insurance
Should you invest the money you would pay to maintain coverage? Unless you have enough assets to allow your dependents to live comfortably after you are gone, you would be better off buying a life policy. Otherwise, your family may have no other means of provisions after your current assets are depleted.
Myth #10: Stay-at-home parents do not need life insurance
The primary purpose of life insurance is income replacement. It helps families replace all or part of the primary earner’s income. Given this, it is easy to think that a non-working parent does not need life insurance. However, that is not so.
Death of a stay-at-home parent can also cause financial hardship. A stay-at-home parent may perform tasks such as caring for children and doing household work — that will cost money to replace.
Consider childcare cost alone: The average hourly rate for a nanny is $15 to $20. That comes to at least $600 per month or $31,000 per year. Multiply this number by a few years, it becomes clear as day why life insurance for a homemaker is a necessity, and not a luxury.
So, how much life insurance should a non-working parent have?
Life insurance needs are hardly ever one-size-fits-all. The amount of coverage needed depends on your family’s unique situation and needs. All the same, keeping the following few things in mind while determining the coverage amount may help:
- How many kids you have?
- How young are your children?
- What is the cost of living in your area?
- What is your average household income?
- How long you expect you will need life insurance protection?
You can buy a stand-alone life insurance policy for your spouse or go in for a joint policy. Joint life insurance covers two people but pays only once — after the death of either the first policyholder (joint first-to-die) or both (joint last-to-die). If your reason for buying life insurance is to provide income replacement for your spouse, consider a joint first-to-die policy.
Another option to buy coverage for your spouse is to opt for supplemental spouse life insurance if you have access to group life insurance through work.
Shopping for your first life insurance policy can be a little overwhelming. Knowing the ins and outs of life insurance, however, makes things easier. Now that you have the most accurate information regarding life insurance coverage, we are sure you will not have difficulty finding your ideal policy. Dundas Life works with top Canadian life insurers and can help you find coverage that is affordable and right for you.