Prospective clients – especially young parents who have never bought life insurance before – often ask me similar questions:
- What is life insurance
- What are its benefits?
- Is it for me? If so, what kind of life insurance is the right choice?
Essentially, life insurance is a form of family protection. Let’s say, God forbid, one of the prime income earners in your family dies. In that circumstance, you would want to make sure you can still pay your mortgage, your car payments, and the rest of your monthly bills, as well as cover all your debts.
Basically, you want to make sure you or your spouse want to make sure the rest of the family are taken care of, even if one of you is no longer there.
Because even if there’s a death in the family, which is a terrible thing, financially, life doesn’t stop.
You don’t want to have to pull your kids out of schools or camps, or activities like music or sports. You don’t want to lose assets, such as your home or your cottage that you had hoped to keep in the family. You also want to make sure your family members can pay for such things as funeral expenses, and probate and estate taxes.
So, the benefits – and perhaps even the necessity – of life insurance are clear. (And in Canada, life insurance claims are tax free.)
But which type is best for you?
There are essentially two kinds of life insurance:
- term, and
- permanent (sometimes called universal, term 100 or whole life, depending on the type you choose and which company you’re dealing with)
The first type, TERM INSURANCE, requires a medical examination and typically requires you to pay a yearly or monthly rate for 10 or 20 years for a specific amount of insurance. You can renew every 10 or twenty years at a fixed rate, which rises as you age, and it expires at 85, after which you can’t buy it any more.
So, for example, a healthy 35-year-old male might pay about $45 a month, or $500 a year, for $1 million worth of coverage over a 10-year term; about $65 a month, or $724 a year for a 15-year term; or $75 a month, or $830 a year, over a 20-year term.
However, once that man reaches 45, assuming he’s still healthy, he’ll pay about $90 a month, or about $1,000 a year for the same coverage for a 10-year term. And the rates keep rising as the man ages, and they could increase even more if he develops certain kinds of health problems.
With the second type of insurance, PERMANENT INSURANCE, you pay a fixed amount yearly (or monthly) for your whole life. However, even if you don’t have to make a claim in the case of early death, your designated beneficiary will get a payment after you die, even if you live to a ripe old age.
For example, a healthy 35-yeard-old male might pay a fixed $300 a month, or $3,600 a year, for $1 million worth of permanent insurance. That amounts to about $180,000 over the man’s life expectancy of 85, and it doesn’t expire at 85.
Also, if you live past 100 – as more and more people are doing and are expected to do in the future – you’ll stop paying premiums, but are still guaranteed a payout.
I tend to recommend to my clients that they buy permanent insurance, if they can afford it, even if the monthly rate is seems much higher than term insurance payments in the beginning. The reason? Permanent is cheaper in the long run, because you lock in a yearly or monthly rate that never changes, and you get a guaranteed payout to leave to your designated beneficiary at a rate of return that’s hard to beat with other investment vehicles.
By contrast, term insurance, while it may seem cheaper at the beginning, will eventually become less and less affordable and, at a certain point, unavailable.
At the end of the day, life insurance, and especially permanent life insurance, is an investment. You’re paying a small amount of money for a large return down the road (one that’s guaranteed in the case of permanent life insurance).
In future blog posts, I’ll get into more detail about the different forms of life insurance.
Until next time…