Life Insurance, Should I Get It?

Don’t you just love talking about death! So many thought provoking questions come to mind.

What happens on the other side? Does your energy or soul stay behind? Is there an afterlife?

But enough philosophy questions, this after all is Downtown Money.

Lets get real for a second.

What actually happens when you die?

Your family goes through a crappy time of mental and physical recovery but they eventually come to terms with the idea that you have passed away. It’s life, you keep moving on.

But there is one major burden that sometimes families simply can’t move on from; the financial loss resulting from you being gone, and this is something that can hold them back for many, many years.

Lets create an example.

James (31) is married to Justine (29) and they have two beautiful kids, Sam and Luke. Sam is 2 and Luke is 4.

James is the main income earner bringing home $80,000 per year. Justine takes care of the kids but works part time making $20,000 a year.

They have a $300,000 mortgage for their condo downtown Toronto and may upgrade to a townhouse in the future so that each kid can have a separate bedroom.

These next 20 years are the most important as their family is being built and their children are growing up.

Scenario Uno: James, the main income earner passes away. Will Justine be able to take care of both kids, pay off the mortgage and other expenses and have enough to send the kids to college?

Scenario Dos: Justine passes away leaving the full responsibility of raising the children to James. He will have to pay for full time care for the kids if he wants to keep his current job. Will he be able to make ends meet?

Both of those situation suck. Obviously loosing that loved one is the most painful, but the financial burden extends that pain for an extremely long time.

When Should I Get Life Insurance?

In my opinion, there are two levels of necessity when it comes to the question of getting life insurance: The “Should have it” folks and the “It’s time” people.

Everyone should have it but there are some situations where it’s crucial to have.

“Should Have It” Crowd:

These are your single ladies and gentlemen. They are living it up downtown, partying and flirting.

This group of people probably don’t have an extra dollar to spend on their life insurance. They have priorities… (Starbucks).

Why should they have it?

Well if they plan to ever have a family or have dependants, the earlier you buy life insurance, the more coverage you can get at an affordable price. You can consider getting a participating permanent policy which over the years will offer more and more coverage with little extra premium.

If you are under 30, it will be much cheaper than when you step over the 40 mark.

Why it’s not crucial yet:

They don’t have dependants, might not have a mortgage and little assets. No one really “depends” on them yet.

“It’s Time” People:

Anyone with kids, married or any other form of dependant.

You are now responsible for not just your life, but others as well. They need you.

If you pass away, you are really leaving them in an unfair position of paying for your funeral ($20,000 +), your income taxes for the year, probates and fees.

If you have assets, they will need to pay taxes.

If you were the primary breadwinner, your partner now needs to figure out how to come up with money to pay expenses. If you were taking care of the kids at home, your partner will need to figure that out for the new future.

It’s all very traumatizing for the family to deal with after loosing you.

If you have dependants, then it’s time to look into life insurance.

What Should I Do?

Life insurance is serious stuff.

As with all serious stuff, you can do some of your own research to get a better understanding of what’s out there.

After that, go speak to a life insurance advisor, preferably one who deals with multiple insurance companies and one who has many years of experience.

Together you will create a needs analysis which is a solid prediction on how much money is needed for the future.

You will create a budget that you are comfortable spending on life insurance.

The advisor can then create a few recommendations he/she thinks will suit you well.

Once you accept a quote, the application is submitted to the insurance company and a medical test is scheduled.

Once everything is done and you are accepted, the policy is delivered to you. You may need to sign the policy on delivery.

What Life Insurance Should I Get?

There are two types of life insurance: Term and Permanent.

Term life insurance covers you for a specific amount of time (Ex: 10, 20, 30 years) for a specific amount of coverage (Ex: $500,000). If you pass away within that term, your beneficiary (the person who you want receiving the money) will receive the death benefit (coverage amount).

Permanent life insurance covers you for your whole life. In many cases, the premiums are set up so that you pay for 20 years, and after that you are done paying and don’t need to pay anymore premium. But the coverage stays for life. Example, you purchase a $100,000 permanent life policy at age 26, you pay $77 per month for 20 years. At age 46, you now don’t have to pay premium anymore but you have a $100,000 policy for the rest of your life. (Do the math on that and let me know if its a good deal)

Both of these policies have a time and place. Term policies are much, much cheaper so you can get a lot more coverage for the price. A healthy non-smoking 26 year old can get a term policies for $1,000,000 for about $38 a month. That same coverage in a permanent coverage would cost at least 10x more.

What many people do is they purchase a combination of the two. They may take $50,000 of permanent coverage for their later years, but also a $500,000 term policy to cover their immediate needs. If you are young, this combination can be very affordable.

As mentioned, your best course of action would be to speak to a licensed professional and together come up with the best plan.

Conclusion

Death is not a topic you want to talk about. I get it. I don’t either. But you should. At least once to get it off your chest.

It’s part of being an adult. You have to do things you don’t want to such as cleaning dishes and buying a couch (inside joke, feel free to ask about it in the comments).

Life insurance is something every should have. But there are cases where it’s crucial to have. It’s just not fair to your loved ones to have to deal with those issues after you are gone.

Luckily, life insurance can fit all budgets and cover most situations.

Later on in life, life insurance can be used as an estate planning tool but we’ll get to that a different time.

For now, get life insurance and go enjoy your life.

Filip Ambroziak is a life insurance specialist in Ontario and works with the largest companies in Canada. If you ever have any questions for him, you can email him at filipa@pbnet.ca.