What Type of Life Insurance is Best?
(Six-minute read time)
There is a lot of reluctance and misunderstanding in the world of life insurance. Some folks don’t see the need for it, especially when they are younger and feel like they will live forever. Some people find that it’s too confusing, and it can be if you try and tackle it on your own. Others may assume that they probably can’t afford a decent life insurance policy and that they will “get to it eventually,” but unfortunately, life doesn’t wait until you’re ready. For most, the main focus behind having proper life insurance is protecting your family, taking care of debts and future expenses, and setting your family up for the future in case of tragedy where your income is no longer coming in.
But which life insurance is best? Before signing up for a policy, you need to consider a few things first.
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(Courtesy of Equitable Life)
Why Do I Need Life Insurance Anyways?
As we age, we typically take on more responsibilities and financial risks, such as buying a home, having children, and paying for education. Life insurance is designed to protect the people who rely on you. The older we get, the more value life insurance has as a safety net in worst-case scenarios.
It not only offers the policyholder peace of mind that the ones they hold most precious will be taken care of, but it also offers their loved ones a sense of relief, knowing they will be able to manage things financially when the time comes.
The funds from a life insurance policy can be used to cover expenses for such matters as:
Funeral expenses
Medical bills
Monthly bills and expenses
Mortgage or rent payments
Student loans
Tuition
Child or dependent care
Things to Consider About Life Insurance
Now that we have a better understanding of why life insurance is so essential, let’s look at a few questions you will need to ask yourself before signing up for any coverage plan to determine what sort of life insurance is best for you. In some cases, you might benefit from the tax advantages of a life insurance policy during your lifetime.
How Long Do I Need Coverage For?
Many different types of life insurance can protect you in case of injury, diagnosis, or death. In this article, we’ll focus on the most popular forms of life insurance. You will need to decide if you want insurance that will last a specific time (term life insurance) or permanent insurance (whole life or universal life). We will touch on this in more detail later.
How Much Coverage Do I Need?
Take some time to calculate exactly how much life insurance you will need. This calculation will be based on your debts, income replacement for your dependents, burial costs, and any other funds you want to leave behind to cover various expenses. Your insurance advisor can help you with this by analyzing your needs.
In general, here are the steps needed to calculate your life insurance needs:
Determine your current income and expenses: Calculate your monthly income and expenses, including housing costs, food, transportation, and other regular bills.
Determine your outstanding debts: Determine your current debts, including mortgage, credit card debts, student loans, and any other outstanding loans.
Calculate your future expenses: Consider your future expenses, including your children's education, your retirement, and any other future plans.
Determine the number of dependents: Determine the number of dependents you have, including your spouse and children.
Determine your desired standard of living: Consider your desired standard of living for your family if you were no longer around.
Calculate your life insurance needs: Once you have gathered all the above information, you can use a life insurance calculator to determine the amount of life insurance you need to cover your family's financial needs.
It's best to work with a licensed insurance professional to help you calculate your life insurance needs accurately. They can help you assess your financial situation and guide you in selecting the right type of life insurance policy for your needs.
What Coverage Do I Already Have?
Before signing up for any policy, see if you already have any coverage through your work or if you are covered by your partner’s benefits. Your employer policy is a good add-on, so it’s best not to forget about this.
Still, it’s not something to rely exclusively on because you don’t own or control the policy. Your employer could change their provider, or you could change employers for any reason, like retirement, illness, disability, family situation, or job satisfaction. If this happens, you might not be able to obtain similar coverage later, or it might become cost prohibitive.
Who Should My Beneficiary Be?
The main beneficiary of your life insurance policy should be a family member or person who you trust to take care of your financial matters after you have passed. You might want to avoid naming a child if they are a minor, as children are typically not allowed to receive the funds until they turn 18. In the meantime, you’ll need to appoint a trustee for them.
Young Couples: If you’re considering insurance among all of the other expenses that you have today, check out our article: Managing Finances for Couples
Understanding the Different Types of Life Insurance
In Canada, there are five different types of life insurance from which you can choose. Deciding on which one best suits your financial needs should be discussed with a licensed professional before making any decisions. Which life insurance is the best in Canada? Well, it’s the policy that offers the holder and their loved ones the peace of mind they deserve.
Term Life Insurance
Term life insurance provides you with coverage for a certain period of your life. It gives your dependents a tax-free lump sum payout if you pass away within that term. A few common options for term lengths include 10 or 20 years, with some term lengths going as far as 65 years if available to you in your particular situation.
Term insurance is a popular option for people who want to protect themselves for a set time and to cover such expenses as mortgages, outstanding debts, education costs, and living expenses for loved ones. It also tends to be the least expensive, but the cost to renew or add term life insurance will go up significantly as you age.
Whole Life Insurance
One of the most popular types of life insurance in Canada is whole life insurance. This form of coverage will be in place for the rest of your life, as long as you pay your premiums on time. Also referred to as permanent life insurance coverage, a whole life policy offers a fixed payout in the case of your death but also contains an investment element.
A percentage of the premium payments you make are placed into a savings component commonly referred to as “cash value,” which serves as a financial safety net in times of financial insecurity. You can pay your premium utilizing the policy’s cash value, borrow against it, or remove it partially or entirely. There are tax advantages to a whole-life policy, especially for business owners, or when you’re already using up your RRSP or TFSA.
Universal Life Insurance
Universal life insurance is similar to whole life insurance, but it comes with a self-directed long-term investing component. Your insurer can provide you with alternative ways to invest the cash value of your insurance, which in turn can be used for your retirement. There is a lot of flexibility on the investment portion amount, from $0 up to a maximum, depending on your situation. This type of insurance can require a more hands-on approach and may be better suited to more experienced investors. Universal life insurance may also not deliver the same rate of return as other investment options, so it is best to consider all your investment options, including risk, return, and tax consequences. Similar to Whole Life, there can be tax advantages in some cases which make these policies attractive.
Mortgage Life Insurance
This type of insurance helps safeguard against mortgage lenders coming after a policyholder’s home after they pass away. The death benefit from the policy is paid to your mortgage lender instead of your family. The advantage of this kind of insurance is the simplicity - you usually just tick a box when you do your mortgage application. The premium amount corresponds to your outstanding mortgage amount when you apply. On the downside, the benefit will decrease over time as you pay down your mortgage. If you sell the house or pay off the mortgage, then the coverage will cease unless you re-apply with the new mortgage or you port your existing mortgage to the new house. When you move, you would normally need to re-apply again.
Group Life Insurance
Group life insurance is a very common type of life insurance that employers provide to their employees. As with any insurance policy type, it has its advantages and disadvantages. It is extremely convenient, as the employer does most of the heavy lifting and it may not require a medical exam.
On the flip side, the policy cannot be taken with you if you leave the company. Most group life policies are generally one-size-fits-all, so you can’t tailor them to meet your specific needs. This kind of policy is good for someone in poor health and may not be approved for insurance elsewhere. In a group policy, there is no guarantee that the policy will stay in force if the plan owner decides to change it for any reason or if you leave the group.
Consult an Expert When Deciding What Life Insurance is Best for You
There is much to consider when deciding what type of insurance policy best suits you and your particular life situation. With so many options available, you may need help. The reality is that the best life insurance you can acquire is a policy that has been designed in the best interests of your loved ones. The topic of life insurance can be uncomfortable, but it’s a valuable discussion that has tremendous payoff if you do find yourself in an unexpected situation down the line. Learn about your life insurance options early, and you can lock in coverage that will be guaranteed even if your health situation changes in the future.
Book a call with the dedicated team at WealthTrack today, and let us help you discover which life insurance is the best option for you and the people you care for the most.
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