Understanding Life Insurance

Generally, you should understand the main types of life insurance, the purpose of life insurance and the fundamental terms used while buying life insurance.

Term Life Insurance vs. Whole Life Insurance

Term life is less expensive than whole life insurance. It can be between 5 to 10 times higher. On the plus side, as long as you pay your premiums, there is no term to a whole life product and the whole life product includes an investment component that term life does not carry. However, the investment component’s return is usually much smaller than other pure investment products. Traditionally, due to their cost (and profitability), whole life was sold for higher commissions which led to sales people putting more emphasis on the whole life products.

Term life is strictly life insurance with no investment component. It has a term during which the premiums will not change. As you age, your premiums will go up after the term has expired but the required amount will also diminish as children eventually graduate and leave the house. Over time, most will become more financially secure and again, the amount required is diminished as your needs change.

Awywi sells only term life from quality insurers at great prices.

What are my choices for coverage types?

We are only going to consider your choices for term life insurance products we offer. Single coverage insures one person. Joint coverage is for two people.

The joint life insurance is commonly referred to as “joint-first-to-die” coverage. It insures two people but pays a benefit on the first death only. Joint coverage may be an ideal choice for couples, since one policy insures both partners. Couples often get this type of coverage to make sure that when one of them dies. the surviving partner has the means to look after any children they may have and pay for future educational expenses and to pay off outstanding debts (like a mortgage).

How long a term should I consider?

Here are some considerations for the period

A “term” is the period of time your insurance policy will cover you.

The most popular term is 10 years and accounts for close to 75 percent of term insurance sales in Canada. A Term 10 policy offers 10 years of insurance coverage at a rate that will not change until renewal. Term 10 is suited for those with teenage children and/or a mortgage that’s well under control yet still needs protecting. The biggest advantage to a Term 10 policy is that it will allow you to change your requirements if your family is evolving. For example, if you have teenage children who are about to enter post-secondary school and graduate within the next 10 years, then you can likely reduce your coverage needs or discontinue life insurance altogether if your circumstance allows it.

The biggest downside to the Term 10 policy is that you are going to be 10 years older and if you need to continue coverage, it will have a higher rate, but if your coverage needs are lower, then you will be able to offset the rate increase by lowering your coverage amount.

A Term 20 policy offers 20 years of coverage with a level premium. The Term 20 is well suited for people with young families where the insurance need is at least 15 years.

A Term 30 policy offers 30 years of coverage with a level premium. The Term 30 is perfect if the insurance need is at least 25 years and is renewable until age 100 for many companies. This option allows two people — usually spouses — to be insured under one contract with the full value of the insurance paid out on the death of the first spouse. The Term to 100 is different. This policy will insure you until age 100 or for life, whichever comes first. Term to 100 plans are best suited for people aged 50-55 because they have a level premium for the life of the contract.

How much coverage do you need?

The most accurate measure of amount of insurance required is to calculate your financial obligations minus the value of your liquid assets during the term required. A far less sophisticated calculation involves using a multiple of your annual salary. You will hear things like 10X your annual salary is a “good estimate”. This is too simple. An example would be one spouse who works out of the home (thus a salary paying job) and another who works at home (typically a non-paying job but many of us would argue that it should be a paying job!). In that case we would also consider a joint policy for younger working parents (in or out of the house) which may save you money over purchasing two individual life policies. This is particularly true if you are dual income earners making roughly the same income.

In the case of the rudimentary 10X rule above the calculation misses the value of the spouse at home. If they are taking care of children, then if they were to die, another care-giver would have to be found. Which is why we recommend a “needs-based analysis” that takes stock of everything you pay for, or would need to pay for in the future.

If you aren’t sure where to start, consider the following factors as well as those that may be unique to your own situation.

Living expenses

How much do you need to live on, what are your monthly/annual obligations that would continue for the surviving family? Rent, utilities, food, car expenses, property tax, etc..

Debt

You want to leave enough for your beneficiaries to continue paying off loans, especially if they were secured by collateral that your dependents need to continue using, like your home or the family car. Even if they don’t live in the mortgaged house or drive the car, they may want to inherit either of these in the future, but creditors will have first dibs and may be able to seize the asset to recoup debt payments.

Dependents

Factor in the cost of raising a child or caring for an aging parent. If you have any dependents, you may need to increase your policy amount by several hundred thousand dollars.  Because parents come from all walks of life, different circumstances necessitate different needs and amounts of coverage. Whether you’re an expecting parent or empty-nester, there’s an appropriate amount of life insurance suited for you.

Children’s education

If you have kids, you might want to factor in the cost of a university/college/technical school education in your decision to get life insurance. Higher education can provide upward mobility and a comfortable life for your children later on but paying tuition can be a huge expense.

Plan for what further education will cost in the future, and take into account that it will increase in the future. This may lead a younger person to consider a 10 year policy in order to assess what the next 10 years would look like (in time). You can adjust your requirements either up or down as you go through the different stages of life.

Health and age

As you age, the less coverage you need because you will hopefully have less debt and fewer dependents to support.

While age is an important consideration when setting your coverage amount, it is not a reason to put off getting a policy. Life insurance rates increase with age. After all, the older you are, the closer you are to death, and a higher likelihood of death results in higher premiums.

So if you purchase a policy when you’re young and healthy, you’ll get a more affordable rate for a potentially larger amount of coverage. For that reason, it’s best to lock in a good rate as soon as you have an insurable need.

Financial cushion

When considering how much life insurance coverage you need, take stock of what you provide for your family. That might include necessities like food and medical expenses, or discretionary costs like family vacations. To get an idea of how financially dependent on you your loved ones are, add up your monthly bills and fixed expenses.

Affordability

How much life insurance can you afford? A life insurance policy isn’t of use to you if you can’t afford it. That’s why it’s important to consider how much you’ll be able to pay in premiums each month. Higher coverage amounts equal higher premiums.

End-of-life expenses

The average funeral expenses range from $7,000 to $10,000 once you factor in the funeral home and burial costs, like the casket. Many policy holders work these final expenses into their coverage so their families don’t bear a financial burden on top of the emotional toll of losing a loved one.