The choosing Life insurance is an issue that most of us will face during our lives. Without meaning to sound morbid, it is a certainty that you will die, so how do you help those you leave behind to cope with losing any financial security that you provided. The first thing to figure out is whether you need Life insurance at all. You will definitely need Life insurance if you have dependents to protect and don’t have enough savings. This article will focus on Life insurance for Canadians, but does provide some general advice regardless of country.
How Much Life Insurance Do You Need?
In the simplest possible terms you need to have a Life insurance policy that will protect the finances of your family, or any dependents, in the event of your death. This may mean providing a suitable income for children, or helping your spouse pay the mortgage.
Neal Frankle, CFP, the founder of Wealth Resources Group, recommends that you go through these questions to ascertain how much insurance you need.
How much debt do you have other than your mortgage?
Any debt will be passed on to your next of kin so if you have a lot of debt, then you will have to buy more Life insurance to cover the debt when you die.
How much do you spend each month?
It is vital to know how much spend each month generally in life, but for Life insurance, you need to know how much you can spend on monthly premiums. If it is difficult to estimate then get personal budget software for your computer to help you calculate your expenditures.
In addition to knowing how much you can afford, you need to know how much your family will need if you die. Make sure you give it careful thought about what they can do with the money you provide. Will it be enough to cover debts, mortgage and funeral cost? Will it be enough to cover college costs? If they invest it, will they earn enough to have a sustainable income? If you cannot answer this then possibly think about getting advice.
How much do you save each month?
What are your longer-term saving goals? How much money do you need to retire and pay for your immediate future?
In an ideal world, you should put away money every month and still live within your means. If you already do this then keep going! It could make Life insurance policies cheaper because you may not need to replace all of your income if you die, therefore you need less term life insurance. If you have put away money expected future costs outlays (new car, kid’s college) that’s fine too. If you do not then you will need more coverage.
Here is an online Life Insurance calculator
Life Insurance Companies
Choosing a Life insurance company can be a tough decision because there are so many out there. Some will be insurance companies that offer other types of insurance. Some may be part of a banking group. And some will be solely geared towards selling Life insurance for Canadians. Let’s look at the top 5 companies offering Life insurance.
- Manulife Financial. A massive global company with a strong financial as a company. They have an extensive product portfolio that covers every corner of the insurance market.
- Great-West Lifeco. These offer a range of insurance policies, but one of the most innovative products is the Residential Mortgage where customers are offered tailored products by the team’s mortgage planning specialists. Mortgage life insurance enables you to add life insurance to your mortgage.
- Sun Life Financial. Sun Life Financial are so big that they claim that 20% of Canadians done business with them.
- Industrial Alliance. One of the 100 largest companies in Canada. They are renowned for the specially designed insurance for new-born babies. It’s called the Peek-a-Boo! It protects against any unexpected accidents and comes free of charge for the first year.
- Desjardins Insurance. They are ranked first among Canadian health and life insurance providers in Quebec. The used to be 4th biggest in Canada but have dropped down a place after the growth of Industrial Alliance.
Whatever company you choose, make sure that it is complies fully within legal regulations. The Insurance industry is one of the most highly regulated industries in Canada. It is the Office of the Superintendent of Financial Institutions (OSFI) that is responsible for supervising federally insurers as well as foreign insurers. In Quebec this is done by Le Autorité des marches. Companies are also controlled at the provincial level and are subject to market conduct regulation by the province in which they do business.
Where to Get Life Insurance Quotes
There are 3 ways you can get a quote for Life insurance. The first is to do the work yourself. Secondly, you can use a comparison website. Thirdly, you can hire a broker.
- Doing the work your self can be very time consuming and not a great idea if you don’t really understand what you’re looking for. You can use a telephone directory or get quotes over the internet. Either way every new company that you contact, you will have to give your details over again. Also, you can avoid the pushy sales people desperate for a sale.
- Using a comparison website takes away the hassle of having to repeat your details. You fill in one form and then they find the insurances to suit you. This video talks you through how to choose your quotes.
- Asking a broker is much the same as asking a comparison website, but now you have a person to talk to. A good broker will give unbiased advice about which insurance is best for you. Make sure your broker is registered with the relevant authorities, and has a good reputation.
Types of Life Insurance
You have decided how much can afford and how much you need to be covered, but what type of Life insurance should you get? There are many choices and again the best policy for you will largely depend on your circumstances. There are 2 main types of Life insurance, Term and Whole Life. Let’s look at the criteria of both.
Term Life Insurance
Term Life insurance is an insurance policy which covers you at a fixed rate of payments for a period of time. In other words, it will pay out a set amount if you die within that set period of time. For example, a pay-out of $600,000 will be paid out if you die in the next 15 years.
After this period is over, the insurance is no longer guaranteed so you need to take out another policy, or live without it. Additionally, if you don’t die during the term, the policy doesn’t pay out and the premiums you’ve paid are not returned to you. You are paying for risk protection.
There are two main types of Term Life insurance Level Term Life insurance and Decreasing Term Life insurance. Level Term is a set pay-out level over a set term This pays out a set lump. The amount you’re covered for remains level throughout the term – hence the name. The monthly or annual premiums you pay usually stay the same. Decreasing Term Life is where the amount you’re covered for decreases over the term of the policy. These policies are most often used to cover an outstanding debt that decreases over time, like a repayment mortgage. Premiums are usually a lot cheaper than level-term cover because of the decreasing amount that you are insured for.
If you have a family, another type of Term Life insurance to consider is Family Income Benefit (FIB) Life. A regular income is paid out until the policy’s expiry date, instead of a lump sum. The benefit of FIB is that it’s easier to work out how much you need, good for if you are on a tight budget. The disadvantage of FIB is that the pay-out remains the same regardless of when you die.
Whole Life Insurance
Whole Life insurance is where the insurance policy is on-going throughout your life and will pay out when you die. Regardless of the age you live to, Whole Life insurance guarantees your beneficiaries a cash sum when you die. Accordingly, the premiums have to be paid throughout your life or in some policies until you reach a specific age, when premium payments could stop but your cover still continues. Whole Life insurance policies are generally more expensive than life assurance because the insurer will definitely need to pay out in the event of your death.
Here is a video with further advice
Life Insurance Terminology
When making your decision on what Life insurance to purchase it is important to be well informed. Financial experts say that most people either have the wrong type of insurance, or they are paying far too much for it. Don’t rely on the insurance company to tell you if you’re over-paying- they want your money!
Trying to read your insurance documents can be exasperating and laborious. Many of the words are confusing or baffling. Make sure that if you do come across insurance terms that you do not understand, find out the answers before making any decisions. Make sure that you understand the details and particulars of the policy. Go through the documents and highlight or jot down anything you don’t understand and look them up. A simple solution!
Here’s is a glossary with the main terms and phrases you might hear when talking about Life insurance. This is by no means an exhaustive list for a more substantial glossary visit http://www.intelliquote.com/resources/life/life-insurance-terms.asp this is where I have got the definitions from.
Beneficiary – Person to whom the proceeds of a life policy are payable when the insured dies. The various types of beneficiaries are: primary beneficiaries (those first entitled to proceeds); secondary beneficiaries (those entitled to proceeds if no primary beneficiary is living when the insured dies); and tertiary beneficiaries (those entitled to proceeds if no primary or secondary beneficiaries are alive when the insured dies)
Decreasing Term Insurance – Term life insurance on which the face value slowly decreases in scheduled steps from the date the policy comes into force to the date the policy expires, while the premium remains level. The intervals between decreases are usually monthly or annually.
Increasing Term Insurance – Term life insurance in which the death benefit increases periodically over the policy’s term. Usually purchased as a cost of living rider to a whole life policy.
Level Term Insurance – Term coverage on which the face value and premiums remain unchanged from the date the policy comes into force to the date the policy expires.
Premium – The periodic payment required to keep and insurance policy in force.
Primary Beneficiary – The beneficiary designated by the insured as the first to receive the policy benefits.
Proceeds – Net amount of money payable by the company at the insured’s death or at policy maturity.
Rider – Strictly speaking, a rider adds something to a policy. However, the term is used loosely to refer to any supplemental agreement attached to and made a part of the policy, whether the policy’s conditions are expanded and additional coverage is added, or a coverage or condition is waived.
Secondary Beneficiary – An alternate beneficiary designated to receive payment, usually in the event the original beneficiary predeceases the insured.
Smoker Ratings – Insurers will give a lower premium rate to consumers who do not smoke or use tobacco. If you have smoked in the past, most carriers will consider you a non-smoker, if you have not smoked for one year prior to applying for coverage. Consumers should be aware that nicotine can be detected in a variety of routine screenings tests that are now commonly required by most insurance companies.
Standard Risk – A person who, according to a company’s underwriting standards, is entitled to insurance protection without extra rating or special restrictions.
Sub-Standard Risk – A person who is considered an under-average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate or dangerous habits.
Term Life Insurance (Term Insurance) – Protection during limited number of years; expiring without value if the insured survives the stated period, which may be one or more years but usually is five to 20 years, because such periods usually cover the needs for temporary protection.
Term of Policy – Period for which the policy runs. In life insurance, this is to the end of the term period for term insurance.
Underwriter – Company receiving premiums and accepting responsibility for fulfilling the policy contract. Also, company employee who decides whether the company should assume a particular risk; or the agent who sells the policy.
Whole Life Insurance – Whole Life Insurance is also known as Ordinary, Standard or Permanent life insurance. Unlike term insurance, whole life insurance provides insurance coverage for the lifetime of the insured. Whole life insurance policies also provide tax-deferred build-up of cash value, payable upon surrender or payment default. Generally, permanent insurance has fixed premiums and death benefits. Other types of permanent coverage, such as Graded Premium Life, Universal Life, and Variable Life, offer variable premiums and death benefits.