Have you ever considered buying coverage for your family, but are not sure if life insurance is worth it?
It’s natural for people not to want to address financial issues around mortality, but what’s worse is the financial distress resulting from an unexpected death.
It’s impossible to predict what life can throw at you but having a life insurance policy can prepare you in case of the worse. There is an old insurance expression about a goose that lays golden eggs. If you could insure the goose that produces these golden eggs, would you?
Most people would say yes. If you are the breadwinner in your family, YOU might be that golden goose (and life insurance is definitely worth it).
As a part of a broader financial plan, a life insurance policy also ensures your plan stays on track. In sports, offence wins games, defence wins championships. Any discussion about financial freedom or retirement isn’t serious without an insurance discussion.
To answer the question "is life insurance worth it?", let’s cover a few key points.
Types of life insurance
It's important to understand the different types of life insurance before buying a life insurance policy. There are several different types of life insurance, but the two major categories are term life insurance and permanent life insurance.
Term life insurance is life insurance that is usually more affordable and less expensive. It only covers life for a certain amount of time, typically around 20 to 30 years. Term life insurance can help your loved ones if you die during this period. The cost of term life insurance will depend on the length of coverage needed (usually in increments of one year), your age when applying, and your health. The life insurance can be used to help pay off debts, like mortgage or car loans, so that the family has some money when they need it most. Term life insurance can have a cash value which pays off the life insurance policy in case of death and is payable to your beneficiary.
Permanent life insurance, on the other hand, is an insurance that stays in place for life. Also called whole life insurance, it provides the insured with a death benefit should he or she die before the life insurance policy expires, and it pays out to dependents if the person dies while insured under this type of life-insurance plan. Permanent life insurance can also be converted into an income stream later on so that once the life insurance policyholder dies, they can still receive a steady income for life. It can also be used for estate-planning and retirement planning.
Pros and cons of term life insurance
Pros of term life insurance include:
- Term life insurance is a more affordable life insurance option compared to permanent life insurance.
- Term life provides an easy way for a family to gain some financial security, in case something were to happen and their breadwinner would no longer be there. Many people have found peace in knowing they will not have to worry financially about their spouse or children.
- Term life also provides a way for families to have financial security without taking on the risk of permanent life insurance, which has an indefinite term and can be expensive over time. Most people who buy term life do not purchase it with intent to keep paying premiums until they die, but instead as life insurance for a set period of time.
Cons of term life insurance include:
- They do not provide life-long protection - it will eventually expire without the individual purchasing additional term life insurance or converting their policy into permanent life insurance.
- Term life insurance policies also have limited options, such as being able to cover just one person's medical needs.
- You cannot build up any cash value over time with a term life insurance policy, whereas with permanent life insurance, you can build up cash value
Pros and cons of permanent life insurance
Pros of permanent life insurance include:
- Lifetime protection - It will never expire. Purchasing life insurance for the entire family is possible as well, and you can build up cash value over time with a permanent life insurance policy.
- Permanent life insurance can provide a death benefit to beneficiaries if you die prematurely.
- Permanent life insurance policies include more options than term life, such as whole life or universal life. These life insurance policies also have cash value that builds over time which is accumulative and tax deferred until withdrawn from the account. This means it would take longer to break even, but a permanent life insurance policy is not limited
Cons of permanent life insurance include:
- It is expensive to buy life insurance for a large family. It is usually more expensive than term life insurance
- On top of the life insurance premium, there are other costs that can be incurred such as annual fees and charges. This would have an impact on your monthly budget if you don't pay off the loan at once
- The cash value will eventually get spent faster than life insurance
- You can't cash out permanent insurance as easily because there are certain criteria you have to meet in order for a financial institution or life insurance company to buy back your life policy.
Is life insurance a smart investment?
There's a lot of talk about life insurance being a "smart investment" but it's not always the case. Life insurance, like most investments, will fluctuate in value and may lose or gain money as time goes on. It is important to weigh your life expectancy (which can vary from person to person) with how long you would need life insurance coverage, and what type of life insurance policy would best suit your needs.
A term life insurance policy does not have a cash value or investment component. So, a term life policy would not be seen as an investment option. Term life insurance is different from permanent life insurance.
Permanent life insurance policies can also be purchased as an investment vehicle, but it is not guaranteed that your money will grow faster than inflation so there are risks involved with investing. Permanent life policy's cash value accumulates with interest while permanent life insurance premiums are paid.
If you were to die during the period of life insurance, then your beneficiaries will receive a death benefit from either term life or permanent life insurance policies. The death benefit is typically equal to the amount of money that was invested in the policy and can be an inheritance for children who may still be living at home.
There are different life insurance policies for individuals and families. Its important to evaluate your life insurance needs before you decide on what kind of life insurance policy is best for you. Factors such as your age, health and financial status play a huge role when it comes to finding the right life insurance policy for you.
There are also many ways to save money buying life insurance that can help keep your life insurance costs within budget.
What can life insurance be used for?
The beneficiary of a policy receives a non-taxable amount from the insurance company at the time of death.
Covering outstanding debt is a common use case. Mortgages, auto debt, credit card debt among others can be paid off with the proceeds from the policy.
Large uncovered debts like a mortgage can quickly and tangibly impact your family’s lifestyle and possibly living situation. If an income source disappears, this large cash injection can either facilitate a lifestyle transition or enable your family to maintain their existing lifestyle.
These transitions are much more difficult than most people realize. In uncertain economic times as well, where gig economy workers are becoming more prominent and some lines or works are more unstable, employer-provided life insurance doesn’t follow you from job to job (and the coverage is usually inadequate).
A life insurance policy of your own can be made to fit your life.
Life insurance choices in your 20s
Most people don’t necessarily need life insurance in their early 20s.
As new grads leave school and start setting up foundations for their lives, they often have no assets to insure. If someone in their early 20s has student debt that they wouldn’t want to burden their family with, in case of death, an insurance conversation might make sense. However, there are other non-insurance options that might make more sense rather than buying life insurance.
However, if someone in their 20’s has bought a house, buying a term policy, makes sense. Many people buy a house in anticipation of starting a family eventually, so if someone in their 20’s buys a term policy to cover the term of their mortgage, not only would that be prudent, that person would get a discounted rate for being young.
Be careful with products that mortgage brokers and banks position and always check with an independent advisor for options. Check out our blog post on Mortgage Insurance vs Life Insurance.
One overlooked area of insurance that people in their 20’s don’t consider often is critical illness insurance.
Everyone seems to know someone that was diagnosed with cancer or some other debilitating illness and there are affordable ways to protect against these unexpected illnesses financially. A critical illness policy purchased in your 20s can be cheaper on a run-rate basis than when buying it later in life and provide protection for decades to come. Press your insurance advisor on what critical illness insurance can do for you.
Life insurance choices in your 30s
Here situations become more complex. Many people have trouble deciding if a life insurance policy is worth it in their 30s.
Different people choose different paths in their 30s, but many have children, buy houses, and take on financial risk. We’re not going to suggest buying insurance just for the sake of having coverage (though we would suggest contributing to an RESP if you have children).
Many people live their 30s differently and a strategy needs to be created just like in wealth management to ensure you have the right coverage and are not overpaying for coverage you don’t need.
Sure, your work might provide some coverage, but simultaneously most of those policies don’t follow you when you change jobs, and many aren’t malleable to your specific situation.
A great insurance advisor will assess your group benefits, mortgage, dependents, and future plans to ensure you are financially covered. Often times this is a small price to pay in light of any of the possible contingencies that can emerge with everyday life.
If you already have insurance, it should also be assessed in your thirties. For people who were anticipating having six children in the countryside to having two children in the city, oftentimes there are different needs and requirements.
Though circumstances may not have changed, it probably makes sense to spend an hour with your insurance advisor to go through options and assess the strategy. If circumstances haven’t materially changed and your earlier plan is still suited for you, your advisor may well tell you to stay the course.
Many people start businesses in their 20s and 30s and there are insurance considerations that need to take place to ensure your business continues to be a going concern. General Liability and Commercial Insurance can be provided to you by a Property & Casualty Broker but, a Life Insurance Advisor can be useful as well.
When it comes to Key Person Insurance or facilitating buy/sell agreements, a good relationship with your advisor can spare you a lot of unnecessary heartaches. Ask your advisor how they can support you in your business.
Life insurance for 40 and beyond
The 40+ stretch is the time when people tend to start planning for retirement.
That’s not to say that people don’t plan decades later, but for people who plan in advance, more options will be available. Generally speaking, between the ages of 60-85, insurance options are not only drastically reduced but also drastically more expensive. It makes sense to plan for the future well in advance.
In the latter years of life people are much more susceptible to illness and disability, and insuring the last few income-generating years prior to retirement may end up being a godsend.
Disability insurance is a complicated topic, but if there is a probability that one might not be able to fulfill the tasks of the job or get disabled in your 50s, income safeguards should be introduced.
Having the right combination of term insurance, critical illness, and disability that jives well with your retirement and estate plan can save someone from unforeseen and significant expenses. An advisor should be able to outline all of the potential challenges to their clients in simple terms that anyone can understand.
So, is life insurance worth it? By now we've answered that question based on your life stage.
To get started, fill out our online calculator to get a better idea of what type and how much life insurance might make sense for you. Our calculator can give you a sense of the price range and we ensure that every recommendation is reviewed by an insurance professional.
Booking a consultation - don’t know where to start? Book a time here and one of Dundas Life’s insurance professionals will provide you with the right insurance plan to ensure your risk is covered.
Check out our blog section around more best practices. There is a lot of material to cover, but if you have questions about anything insurance, we’d be happy to help you here.