Buying a life insurance policy is something most people will consider in their lifetimes. By doing so, you’ll be protecting the financial future of your family and if the worst happens, they will be financially prepared.
However, choosing the right policy can be a challenge. What’s the difference between a Canada Life and a Manulife policy that look the same on paper? You’ll have to look at a number of factors before making an informed decision, and a good advisor should help you every step of the way.
Where do we start?
This article will give a quick introduction into 7 considerations and questions that should be asked when looking into buying life insurance including:
1. How much life insurance do you require?
People buy life insurance for financial security and life events that they anticipate in the next few years, such as taking on debt or starting a family. But you should also be prepared for the unpredictable things that could happen in life like death, illness, or disability.
How much money would you require for your family to make the necessary lifestyle changes in case of your death?
The general rule of thumb is that you start with 2x your income for life insurance, and 1x your income for Critical illness and disability on a need’s basis.
There are many factors that have to be taken into consideration when buying life insurance, including debt and plans for the future. You need a long-term plan, which means it’s time to take out your calculator and start crunching numbers.
Let’s start with the “easy” questions that need answers.
- How much money do you make in a year?
- How much money do you have in your saving accounts?
- Do you have any passive income?
- Are you the sole provider for your family?
Other questions to consider are:
- What are your yearly expenses?
- When will you be spending large amounts of money in the future? For example, when your children start collage or planning upcoming medical expenses for a member of your family.
These are crucial questions you should ask before coming up with a final coverage amount. But it shouldn’t have to be hard, use Dundas Life’s estimate calculator to receive an accurate quote delivered straight to your inbox.
2. How to choose the right policy
Life insurance policies vary, and they all come with terms and conditions depending on the provider. These are the four main categories:
- Term Life Insurance
- Whole Life Insurance
- Critical Illness Insurance
- Disability Insurance
A term life policy means that you pay your monthly fee (premium) for a fixed number of years. Once those years are up, you can purchase another life insurance policy for a new fixed term.
A whole life policy is precisely that – you will pay it your entire life. However, the reason this life insurance is popular is because of its increase in value. Moreover, you can use a whole life policy in other ways, such as accessing its cash surrender value or borrowing against it.
Critical illness insurance is a policy that pays out a tax-free lump sum if you develop a specified illness, health event, or undergo treatment while under its coverage. You chose the period of time that this coverage will be available for, also known as term length, when you purchase it. Term to 65 is very popular, but term 10, term 20 etc. are also available.
Lastly, disability insurance is a policy that offers you protection if you were to become disabled, due to an accident or a degenerative illness, by typically replacing 60-85 precent of your regular income. The definitions can vary with regards to what a disability constitutes (own occupation, regular occupation, any occupation), but an advisor can work with you to find the right type of disability policy. When a claim is made, your claim payment is made to you until you resume working or until the end of your disability coverage period – whichever comes first. Here are more details about how each policy type works:
- Own Occupation Disability Insurance – the inability to fulfill most of the functions an individual was trained to perform regardless of if you have employment elsewhere
- Regular Occupation Disability Insurance – inability to work in your in your regular occupation
- Any Occupation Disability Insurance – the inability to work in any occupation
The critical thing to remember is that these policies come at different prices and benefits. Choosing the right one will involve a lot of planning, and at the end of the day, it’s a long-term investment.
3. How much should I spend?
As mentioned, life insurance comes with monthly payments. So, you need to figure out how much of your monthly income you can afford to spend on the policy.
Moreover, some policies come with scheduled monthly payment increases over time.
Ensuring that your family budget can handle these premiums for the whole duration of the policy is key.
Even though it is not possible to predict the future, making an assumption on your current financial situation is important. Don’t let price be the only consideration when buying insurance.
Work with an advisor to ensure that your needs are covered from the insurance that you’re buying. Purchasing inadequate insurance or the wrong kind of insurance can be a very costly mistake in the future.
Also, overbuying insurance can impact your ability to save a nest egg for emergencies and retirement. Striking a balance is important.
4. Do I need an advisor?
An insurance advisor is a resource whose experience you can tap into free of charge. Whether you go through the life insurance buying process yourself or through an advisor, the price for the policy will be the same. Even if you have a legal or financial background, you can ask questions and get detailed answers, which will enable you to make an informed decision. In addition, they can provide you feedback on the claims experience.
Independent advisors work with all the carriers and more importantly, you’ll have someone to rely on during the application process.
However, you have to be careful when choosing an insurance agent. Check credentials, ask around, and see if you know anyone who have worked with them before.
5. Read the fine print! (we know that’s not a question)
Reading the fine print of a life insurance contract is something that should not be taken lightly-this is where advisors make their money. You’ll need to look through the documents with great care and check every clause in the contract, because it can make a huge difference when you make your claim.
If you are unsure about something, you should ask your agent or insurance policy provider.
If you’re committing to pay a portion of your monthly income for many years into a life insurance policy, you want to make sure the policy is right one. Products that look similar based on price could vary drastically in the fine print.
6. Are you getting life insurance through your job?
If you have group benefits through work, you probably already have some life insurance. In most cases it’s a general plan with adequate coverage for a funeral and maybe a little extra.
However, these basic plans are not tailored to your financial situation. Fortunately, it can be relatively affordable to complement existing work coverage with an additional life insurance policy.
Remember, if you lose your job or change jobs, your life coverage through work doesn’t necessarily come with you. Buying an insurance policy with an advisor outside of work can provide a level of predictability. It can also reduce sticker shock especially if you’re looking to purchase a policy later in life.
7. How important is your lifestyle?
Insurance companies aren’t in the business of telling you how to live your life. However, if your lifestyle impacts the likelihood of living a long life, they’ll price it into your insurance policy.
Life insurance companies will assess your health and lifestyle choices to determine how much to charge for your insurance policy. And this includes everything from alcohol and tobacco consumption to age, gender, and weight. The insurer will look into your medical history and daily habits.
If you’re not seriously interested in coverage, would your family be comfortable switching from a large house to small apartment if the breadwinner passed away? Or from your own car to a bus pass or bike? For some people this might be palatable. But the small price of insurance on a run rate basis can save a lot of potential financial grief.
Not every company will evaluate risk in the same way, so you may want to check out a few companies until you find the one that best suits you.
Thinking about life insurance can be difficult, and it’s not fun or easy. But, securing the future of your loved ones is essential and will give you peace of mind.
And remember, if you need any assistance along the way, you can always contact a professional!
No matter what stage you’re at in life, keep these 7 things in mind when picking the right life insurance policy. Don’t hesitate to see what options are available for you - at Dundas Life we offer a digital experience to help you all from the comfort of your own home. Don’t hesitate to reach out to us with any questions you may have here.