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Life Insurance Awareness Month

September 13, 2019Financial Fitness

September is Life Insurance Awareness Month and a good time to take stock of what you have and whether or not you need to fill any gaps in your insurance coverage.

Thinking about dying and moving from earth to heaven can be hard to contemplate for many of us. Particularly when we think of the impact it will have on the people who love and need us. But it’s for that very reason that we must have those difficult conversations.

Over the years, life insurance has gotten a bad rap. Financial Advisors know that the quickest way to clear a room is to let people know what they do for a living. However, stop and think for a moment of the other professionals you rely on in your personal or business life and ask yourself this question, “If I die which one of them is going to deliver a cheque to make sure my family will be ok, or that my business will have the funds to continue to operate?” In reality, they are more likely to be part of the group asking for money because there is now uncertainty surrounding the financial health of your family or business. This isn’t a criticism of their professions it’s just the reality of the world we live in.

At the most basic level, life insurance isn’t complicated. It’s simply a tool to replace income. Statistics show that three in four Canadian households would have difficulty paying living expenses if the primary wage-earner were to die. In these cases, the surviving family members will need to replace the lost income or change their lifestyles—or sometimes both.

Similarly, if you are a key person in your business and your loss would have a material impact on revenue generation, you need a plan in place to back-fill that lost revenue. Insurance is often the best and most cost effective solution to bridge the gap until the business can regain its footing.

Given the importance of this lifeline, it’s surprising that 1/3 of Canadian households do not have any life insurance at all, and unfortunately, 42% of Canadians put expenses, such as cable, ahead of buying life insurance.1

Broadly speaking, there are two categories of life insurance: Term and Permanent. Within each of these categories, there are different plan types that can be customized to a lesser or greater degree to meet your specific needs. The first question you need to answer is whether or not you have a temporary or permanent need. The table below highlights some needs for which people typically seek an insurance solution.

How would you describe your financial needs?

Temporary
  • Mortgage payments
  • Income replacement
  • Loan repayment
  • Children’s education
Permanent
  • Wealth transfer
  • Estate protection
  • Charitable giving
  • Final expenses

In addition to meeting different kinds of needs, the two insurance categories have different features and benefits to consider based on the objectives you’re trying to achieve with your insurance plan. The table below steps through some of the key differences between term and permanent insurance.

Temporary

Lifetime Guarantee
With a traditional whole life insurance policy, the premium will never change and if you buy it when you are young, you will have lower premiums. With some contracts you may be able to plan for scheduled premiums– allowing you to budget accordingly.

Flexible
It can be used to cover a variety of needs and work as a tool in estate planning. It can also be an effective solution in more complex plans where tax, retirement options, wealth transfer strategies, or charitable giving are the main drivers.

Cash Value
Permanent policies provide a variety of options to accumulate cash value inside of the policy, on a tax-preferred basis. This feature can provide owners with choice in their long term planning.

Growth Potential
Depending on the kind of permanent insurance you own, you may have different investment choices inside the policy or dividend options that may provide significant growth potential.

Permanent

Limited Guarantee
Term insurance rates are guaranteed for the life of the policy but increase after each term renewal. Term contracts come in various lengths, 10, 20 and 30 year and expire before age 100, typically age 85.

Renewable
Provides an option if the temporary need persists longer than expected. Term insurance is renewable; however, the cost will be quite a bit higher upon renewal.

Cost Effective
Term insurance provides the most cost effective solution for needs where protection for a fixed period of time is the primary consideration.

Conversion Options
Most term contracts allow you to convert all or some of your term coverage to permanent insurance without having to answer any medical questions. This allows you to optimize coverage when younger and still have options for permanent insurance later.

Determining how much you need is very specific to your individual needs. If you’re simply trying to cover a debt like a mortgage, it’s pretty straight-forward, but if you’re trying to determine how much money your family will need in general, it makes sense to sit down with a trusted advisor who can help guide you through the process. According to industry research by LIMRA (Life Insurance and Market Research Association, now LIMRA International), almost 80% of people overestimate the cost of life insurance.

When you consider the cost of not having it, and what you spend on other things in life, it’s a simple decision. We know it sounds cliché, but it really can cost as little as a cup of coffee, or less, a day. A life insurance policy is a wise use of money to protect your family against setbacks. Life insurance is really about living without worrying about your family’s financial future should the unexpected happen.


1 Canadian Life and Health Insurance Facts, 2016 Edition