There is so much information in the world of life insurance and at the same time, so much misinformation. Hopefully along with this website I will be able to blog frequently and separate the truths from the myths for my viewers. For the first few posts I am going to talk about the basics of life insurance. Here are 5 important points to consider when purchasing life insurance.
1. Know the reason you are buying life insurance.
The most important point is also the first. Are you buying it to protect your family in case something should happen to you? To leave a sizable estate as part of your legacy? To fund a buy-sell agreement with a business partner? Knowing the reason you’re buying life insurance will help you believe in the value that it brings to your loved ones and let you appreciate the policy that much more once it is delivered.
2. Know how much coverage is adequate.
If you are purchasing life insurance to protect your family, how do you know how much is enough? Are you looking to have the death benefit pay off all your debts (mortgage, loans, etc.) and pay for your final expenses (tax, funeral costs) or do you want it to provide a stream of income to your loved ones to replace your lost income? How much coverage is necessary to ensure your children receive the proper post secondary education from your death benefit? If you’re retired, how much is needed to pay the taxes on your RRSPs to pass it on to the next generation? Depending on your preferences and needs, each of these options will affect how much life insurance to purchase.
3. Term or permanent.
Term is more suitable for a temporary need and is strictly for protection, while permanent covers the need for an entire lifetime and may have additional benefits. The costs of term is initially much lower than permanent, but increases exponentially, which is why it is rare to keep a term insurance past a certain age, like 65. While permanent costs more initially, the premium is level throughout its lifetime and is therefore more affordable at a later age. Further benefits and drawbacks of each are listed in their respective pages on this site. An alternative to term and permanent is Lifephases, underwritten by Assumption Life. It provides a happy medium between term and permanent life insurance.
4. Choose additional options.
Buying life insurance is like buying a car. You can choose something plain that can get you from point A to point B, the insurance equivalent of which is a bare policy. You can also upgrade a car with heated leather seats and built in GPS, much like you can upgrade your policy with options. Also known as riders, they help round out a life insurance policy and customizes it for your specific need. For example, the guaranteed insurability benefit, which gives the policyholder the right to increase coverage at a later date, is appropriate for business owners starting out who see their business growing in the future. Also, a term insurance rider on a permanent policy may be the mixture of short and long-term protection that your family needs. Different riders can personalize your policy for your specific need.
Unlike buying a car, life insurance has to be renewed annually. It is something that has to be built into your monthly budget. Therefore, you must decide how much you are willing to spend on insurance. Keep in mind that riders cost extra money and term insurance rates jump dramatically at the end of the term. An ideal amount spent on all individual insurance policies ranges from 5-10% of your annual income, but this is dependent on the person’s circumstances.
As you can see, there are many questions to ask yourself when considering the purchase of an individual life insurance policy. Some people suggest buying term and investing the rest. Others like the idea of forced savings with permanent policies. Fact is, there is no “perfect policy” that is suitable for everybody. The only perfect policy is one that is in force at the time of death of the life insured. Start by discussing with your family what your objective is for purchasing life insurance, and speak to a licensed insurance professional about your different options.
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