What is Life Insurance?

You are on track to reaching your goals in life. You may have landed your first full-time job, moved out of your parents’ home and purchased your own home, be thinking of getting married or just landed a big promotion. You might also be thinking of getting life insurance to protect yourself, your loved ones or your assets. Life insurance can help you protect your family and dependants from financial hardship and debt when you are no longer there to provide for them. 

How does it work?

Life insurance, like all types of insurance, works by spreading financial risk among a large group of people, who pay into a pool or fund. This minimizes costs for an unexpected event like death. Think of it like depositing money into a safety net that will safeguard your loved ones and your assets, and repay your debts when you no longer can. 

You may have heard from your family and friends that getting life insurance at a younger age is a benefit to you. But why? Because when you apply for term or permanent life insurance, the insurer assesses the degree of risk that you represent. They look at things like your age, gender, weight and medical history and then place you into risk categories which help determine your premiums and your coverage. Usually the younger and healthier you are, the lower the risk and the lower the premiums. 

Your life insurance policy is a contract between you and an insurer. You agree to pay a fee called a premium, and the insurer agrees to pay your beneficiaries or your estate an amount of money upon your death. The payout to your beneficiaries, known as the death benefit, is a tax-free lump-sum which can be used to pay for your funeral. It can also be used to pay off student loans and other debts, provide for your loved ones, donate to charity or set up a trust. 

 

Your Estate

When you die, all of the assets and debts you leave behind (except your primary residence) are called your ‘estate’. Before your loved ones can inherit any money or property, your estate must pay for: 

• any debts you left behind; 

• capital gains tax (you are considered to have disposed of all property at fair market value immediately before death, and the value of your estate is taxed accordingly); 

• estate administration tax, formerly known as probate fees (a tax applied to your estate to cover administration fees such as checking your will and paying creditors). 

Your estate will have to pay off your debts with whatever assets you had. Your house, cottage, car or other investments could be used to pay off your debt. If your estate doesn’t have enough assets to pay off your debt, it will be considered insolvent, meaning your debt cannot be paid. Unpaid debt does not get transferred to your family.

 

Your Beneficiary

If you name a beneficiary on your life insurance policy, the insurance money (death benefit) does not go to your estate, it goes directly to the beneficiary. The beneficiary may keep the money for their own purposes, or they may put the money toward settling your estate. Make sure your beneficiaries know how you want the death benefit used, or make provisions in your will to ensure your wishes are met. Be sure to keep the beneficiaries section in the policy up to date as the years go by.

Example: If there’s a cottage that the family would like to keep, the beneficiary can decide to use the insurance money to pay off estate debts or capital gains tax so that the cottage doesn’t have to be sold. Although the beneficiary is not legally obligated to use the insurance money to pay off estate debts, it would be easier for other living family members to not have to pay off the estate debts.

 

Do You Need Life Insurance?

If you aren’t sure if you need life insurance, ask yourself these questions:

• How much do I contribute to my family’s budget? If I die, will my survivors (partner, children and dependants) be able to take care of themselves?

• Do I have any other dependants such as parents, grandparents or siblings?

• As a single parent, what kind of support payments am I receiving or paying? If I die, how will these continue?

• Do I want my mortgage paid off in the event of my death?

• Do I want money put aside for my children’s education?

• Do I want to leave money to any other family members or organizations?

• Will I leave behind unpaid debts that will reduce the value of my estate or that may burden my family?

• How will my business be affected after I die?

• Could life insurance play a part in my long-term financial goals? Permanent life insurance policies build cash value, an amount of money that accumulates in the policy. In the future you could use the cash value of your policy to boost your death benefit, pay your premiums, supplement your retirement income, or take out a policy loan. 

 

Life insurance isn’t one-size-fits-all. Your unique situation will determine if and when you should buy it and how much

you’ll need. 

 

How Much Life Insurance Do You Need? 

How much insurance you need depends on a number of factors including how much your survivors will need when you die and the value of your assets. Completing a financial needs analysis which evaluates your current financial situation, your assets and debts, your personal situation, your personal goals and the needs of your family can help you. Most insurance agents and companies provide models, examples and recommendations online.

 

Exclusions

An exclusion is something your life insurance policy does not cover. Exclusions can include death by suicide within two years of purchasing your life insurance policy, death from high-risk activities such as sky-diving and death from pre-existing medical conditions. For other exclusions, speak with your insurance agent or company.

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What is Life Insurance?

Life insurance is a contract between you and the insurer. In exchange for premium payments, the insurance company agrees to pay a specific amount to your beneficiaries upon your death.

 

Terminology You Should Know

Life insurance has its own language — but thankfully it’s not too complex. Very soon, insurance terms, such as premium, beneficiary, and death benefit, will be intuitive and easily understood.

Here are the most common life insurance terms you should know.

• The insurer: The insurance company that provides the insurance cover

• The policyholder: The person who owns the policy. In most cases, the policyholder and the insured are the same people.

• The insured: The person whose life the insurance policy covers.

• Death benefit: The amount of money the insurer will pay to the policy’s beneficiaries when the insured passes away.

• Beneficiary: The person(s) entitled to receive benefits of insurance.

• Policy length: The term of duration of the life insurance policy. It encompasses the time between the date on which the policy goes into effect and the date on which the policy ends.

• Premium: The amount of money you pay the insurer for the life insurance coverage.

• Cash value: Many permanent life insurance policies have an in-built savings component called cash value. Policyholders can withdraw or borrow against their policy’s cash value. Term life insurance policies don’t have this feature.

 

What Can a Life Insurance Claim Payment Be Used For?

Your beneficiaries are free to use the death benefit from your life insurance policy in any way they see fit. They may use it to cover your funeral costs, pay off debts, or take care of personal bills. They may even choose to invest the payout for the future.

If you didn’t name a beneficiary, the proceeds will go to your estate.  

 

How Much Does Life Insurance Cost?

The cost of life insurance depends on many factors, such as amount, policy type, age, gender, and health.

While you can’t do much about your age or biological sex, you can purchase life insurance at an early age to keep your premiums down. Adopting healthy habits, getting less coverage, and picking term life can all help you qualify for low premium rates.

For the young and healthy, rates can be cheaper than a cup of coffee. For example, monthly premiums for a 20-year term policy worth $500,000 for a healthy 30-year old woman can cost around $25 per month. That’s less than a dollar a day! If she reduces the death benefit or lowers the term length, her premium rate will be even lower!

The long and short of it is that life insurance doesn’t have to be expensive. You can tweak the coverage to fit your budget and still get a good deal.

 

Do I Need Life Insurance?

You buy life insurance not for yourself, but for the people you love. So the question is, do they need it?

Ask yourself these questions to find if you need to buy life insurance.

Does someone in my life depend on my ability to make money? This could be a spouse, partner, child, or parent. If the answer is yes, you’re a likely candidate for life insurance.

Do you have any debts you would pass on to your family after your death? This could be a mortgage or any lines of credit, credit card debt, etc. Having coverage can keep them from being saddled with your debt.

Do you earn the lion’s share of the household income? If you’re the primary income earner, you probably need life insurance. It will ensure your loved ones get what they need to live comfortably after you’re gone.

Do you want to leave a financial legacy? If you want to leave a financial legacy to your kids, a favourite niece, or a charity, life insurance can provide them with a tax-free gift.

 

How Much Insurance Should You Have?

The amount of coverage you need will depend on your personal and financial circumstances. But you do need enough to cover your obligations after you pass away.

While it’s not possible to pinpoint the amount of coverage you need down to the penny, there are ways to come up with a good estimate. You can start by calculating your long-term financial obligations and then deducting your current assets from that figure. The remainder is what life insurance should fill.

Another way is to multiply your annual income by the number of years left until retirement. For example, if you are 45 years of age and make $20,000 per annum, you will require $300,000 in life insurance.

Some experts recommend you should aim for 10 to 15 times your annual income, so that’s yet another strategy you may use, however, the approach can change depending on your situation.

If you hate crunching numbers, consider using a life insurance calculator to figure out how much life insurance you need.