Life Insurance: When and Why You Should Consider It

The decision when to apply for life insurance is not necessarily how old you are but rather what stage in life you are at. As with all financial planning strategies, one size does not fit all and everyone’s situation and life circumstances are different.

Identifying Financial Dependents

If you have children or dependents, life insurance is always crucial. If you own a house with a mortgage or owe a large sum of money, your life should be insured to cover the debt. Outside of the obvious debt obligations, the key factor when determining the need is to ask yourself. “If I were to pass away, is anyone dependent on me financially”. Sometimes this answer is not so obvious.

This person could be a spouse or partner if you have a mortgage together and especially so if you make significantly more money than they do. A dependent is not always a child, it could also be an aging parent. As we get older, and our parents age, we can sometimes take on more of a financial responsibility in their care and day-to-day expenses. This is very common and becoming more so today. Regardless of the reason you find yourself in a finically supportive role, if they are depending on you financially or replying on your future income to support themselves, they are what we consider a financial dependent.

Understanding Term and Permanent Life Insurance

There are two broad categories of life insurance. Term life & permanent life. Term insurance – typically the more affordable of the two options covers liability for a specific stretch of time such as a 10-year or 20-year period. The premiums are static and remain unchanged for the specified term and will increase after the term ends. Depending on the type of “term” insurance you purchase, most are what are considered guaranteed renewable and convertible. This means should you still require the insurance after the term is up (and qualifying for new insurance is likely not possible due to medical reasons) the policy is guaranteed to renew with no medical at the predetermined rates in the contract.

If you still require the insurance after a specific period and remain in good health then applying for new insurance and undergoing medical testing is most ideal for a more favourable rate. The insurance carriers build in the risk of the “guaranteed renewable” wording of the contract into the renewal rates. They know, should you remain healthy and still require the insurance you would apply for new insurance and obtain a much cheaper rate than the renewal. So, for those clients who receive renewal letters in the mail when their term is up and are shocked by the rate increase for the next term, rest assured you're not expected to pay those rates, if you are healthy and still require the insurance you can apply for new insurance at a much cheaper rate! Having said that, for those who would not qualify for new insurance and still require life insurance, the guaranteed renewable option is an excellent benefit to term insurance.

Term insurance can usually be converted to permanent insurance, which is lifelong protection that does not expire or renew, this type of insurance would be used for a more permanent life insurance need such as “when I die” vs. “if I die during this period of time”. An example of that type of need would be more estate planning focused. A large tax bill due on your estate, or a gift you want to leave your family are some examples of when this type of insurance would be more appropriate.

To best understand the difference, term insurance is for people who have time-limited expenses or liabilities while permanent insurance is for people who have no expiry date for their expenses, taxes, liabilities, or gifting wishes.

Most younger people who are good candidates for life insurance should get term insurance. The term should align with the length of your mortgage for example, or the appropriate length your children/dependents will be financially dependent on you.

Determining the Coverage Amount

Determining the amount of insurance required is done by completing a proper needs analysis factoring in debts and expenses along with existing assets and insurance plus whatever amount is needed to keep your dependents financially stable.

Rates for term insurance is inexpensive for most people. Someone in their mid-30s (non-smoker) might pay $30-$50/mth depending on the amount of insurance required and the term length. While smokers will pay double the price, no matter the age.

There are also some people who should consider life insurance before becoming a parent or buying a house to take advantage of locking in premium rates when you are young and healthy. Anyone who might have health concerns related to family history and who is planning to start a family would also be an ideal candidate for life insurance to lock in those premiums now before future illness drives up the cost of insurance or worse, you’re not insured.

Timing and Workplace Coverage

Many employers who offer benefits might include life insurance, it’s important to know exactly how much you are covered for. Standard amounts range from $10,000 to 1 x annual salary. While this might seem like a lot, depending on your situation it’s certainly not enough to cover two children until they are financially dependent. The rule of thumb here is to always consider your workplace insurance secondary to whatever insurance you might apply for on your own, especially considering you don’t know how long you will remain with your employer.

As always, it's best to talk to us when it comes to how much life insurance is required, the type of insurance that is appropriate for you, and if you need to reconsider the amount of insurance you currently have in place, as life happens and goals change.