Life insurance can be an uncomfortable topic to think about – no one likes thinking about not being around anymore. Like many things in life, however, it’s the things that can make us feel the most uncomfortable that are the best for us.
The fact of the matter is, life insurance is one of the best decisions you can make for you and the people you care about the most.
And the vast majority of people realize its importance: 90% of people surveyed in a recent study said they believe the person earning the primary income should have it. Herein lies the disconnect. While most say they should have it, comparatively less actually pull the trigger. Only 60% of people in the same study said they have a life insurance policy.
This article is made for people who know the value of life insurance, but don’t know if they should have it or not, and/or don’t know where to start.
I’ll tell you who needs it and cover some basic facts about life insurance that will start you on the path of making an informed decision about life insurance policies.
Who needs life insurance
Life insurance is for anyone that will have debts to cover after they’ve passed on. These liabilities can come in the form of outstanding loans, mortgages, debts, funeral costs, and living expenses for your next of kin.
It’s supremely important for people who have others that depend on their income, but it also has its place for individuals with no dependents.
Where to begin? You’re in a good place by starting with learning the basics of life insurance policies.
Before you spend any money on anything, though, make an appointment and talk with an independent insurance broker or a fee-only financial planner.
These two entities will help you make the best decision based on your current life situation, and, because they won’t be the one selling you anything, serve as an objective voice.
Because they’re impartial, you don’t have to worry that you’re getting duped into anything for their benefit and not yours.
Before you go into that meeting, arm yourself with some basic knowledge so you can be an active participant in the discussion and get the most out of your time with them.
The major types of life insurance policies
There are two major types of life insurance policies, both with their own pros and cons
- Term life insurance
Term life insurance is the type that most people think about when talking about life insurance in general.
Basically, you sign on for a certain number of years – ten, twenty, or thirty, most commonly – and you pay a premium every year for that period.
If, god forbid, you pass away during the time you’re paying your premium, your beneficiary (i.e. the person you say you want to give the money to) gets money.
The premium you pay every month and the money going to your beneficiary are agreed upon when you sign up for the policy.
The benefits of term life insurance are that the premium is fixed, so you always know what you’re going to be paying; it comes at the lowest possible price; it protects you during the years when you and your family are most vulnerable; and you can pay into it during your prime working years.
For most, your mid-twenties to your fifties are vulnerable years for your family – the kids are growing and are dependent on your income and you’re still trying to establish your place in the world.
Covering your family in case something terrible happens during this time is very comforting.
The major drawback to term life insurance is that you get no reward for taking your policy to its full term.
If you’re fortunate enough to live past your policy – and everyone hopes you are – all the money you paid into your policy is kept by the insurance company who issued it.
2. Permanent life insurance
Permanent life insurance is the other major type available.
In contrast to term life insurance, permanent stays in effect as long as you keep paying your premium – it’s essentially an open-ended policy.
The first benefit of permanent life insurance is that it will potentially pay out no matter how old you are. If you keep paying the premium into old age, you could die at 95-years-old and still expect your beneficiary to get a payout.
Permanent life insurance policies also accumulate cash value (the amount of money offered to you if you cancel the policy) on a tax-deferred basis and serve as investment vehicles. Basically, they are a way to make your money grow AND protect you in the instance of a tragedy.
Permanent policies sound enticing because of the additional benefits, but they come with one major drawback: they’re way more expensive than your standard fixed term.
The premiums on permanent policies can run you as much as 10 to 20 times more than the premiums on a term policy.
Which one do you go with?
It really depends on your financial and life situation, but the most common is a term policy. It gives you basic coverage at a price that won’t break you financially.
Permanent policies have a lot of beneficial features that can make sense for you under certain conditions.
For example, financial advisors will generally recommend them to people who have already maxed out their contributions to RRSPs, TFSAs, and RESPs and still have more savings than they could spend in their lifetime.
It really depends on where you’re at financially and what your needs are.
Navigating the world of life insurance can be overwhelming and tricky – especially when you don’t know who you can trust. Everyone will tell you their product is the best.
It can also be a tough sell when you have so many other financial burdens you’re trying to cope with. You may be paying down debt, saving for retirement, or just trying to make ends meet in general. But, the investment is worth it. Just knowing the people you care about are going to be okay if you’re gone is comfort enough.
I hope you found the information useful and please feel free to comment below with any questions. Also, follow Healthy Wheys on Instagram, Facebook, and Twitter and follow the blog!