As we travel through the journey of life, our financial needs and obligations undergo constant change. For example, your financial obligations increase once you are married, and continue to do so as your family grows in size. It should come as no surprise that insurance varies in importance at different stages of life. Proper planning at each stage of life is necessary to ensure that you and your dependents are protected. Without knowing the risks and a plan to minimize the risk, you are potentially exposing your family to a financial disaster. Here are which types of insurance you should be aware of at each stage of life.
Young and single
Because you are single, you do not have any dependents yet. These are people who rely on your income to cover their living expenses, such as a spouse or child. Therefore, your death would not devastate anybody financially, and life insurance is not a priority at this point. There are cases where life insurance would make sense, such as with a dependent parent(s), but these are exceptions to the norm.
You may wish to lock in your insurability at this point while you’re young and healthy. Life insurance premiums are based on age and health, so an unhealthy and older individual would have a tougher time qualifying for life insurance than someone who is young and healthy. By the time you wait until marriage to acquire life insurance and your health has deteriorated, it may already be too late.
The more pressing need at this stage of life is disability insurance. If you are disabled long term and unable to make an income, how will you pay your bills and save for retirement? It’s crucial that you transfer this risk to an insurance company, either through your group plan at work or through an individual disability insurance policy.
Critical illness insurance also deserves a long look at this stage. A critical illness may keep you out of work for a period of time while you recover, and the lump sum payment can be used for income replacement, treatment and medication that is not covered by the provincial health plan, and even travel out of country for medical treatment. However, it does not replace the need for disability insurance. Rather, they protect you from completely different things and complement each other.
This is where the need for life insurance becomes very high. You’ll want to ensure your spouse does not suffer financially should you pass away prematurely. While there are differing opinions on how much coverage to get, at the minimum you should have enough life insurance in place to pay off the mortgage and other debts, pay for final expenses and provide an income for at least a few years.
Term insurance is the most affordable at this stage, but before blindly purchasing any term policy, you should try to envision your financial situation at the end of the term. Will the mortgage be paid off? Will your children be independent? Planning ahead not only helps you choose the right term for your needs, but also eases your decision at renewal time.
Although life insurance is now top priority, disability and critical illness insurance shouldn’t be neglected. Both of these will remain essential throughout your working years.
Married with children
No, we’re not talking about the sitcom. Instead, this is the stage of life where all three of life, disability and critical illness insurance are vital for a complete protection package for you and your family. You may want to review your life insurance to make sure the coverage is adequate, since you’ll now have to account for education funds and a larger income protection. As your income grows, you’ll also want to review your disability insurance to make sure the monthly benefit is sufficient.
Once you’ve reached this stage, all your policies should be in place. The only thing left for you to do is to monitor them once every few years, or when a major life event occurs, such as a promotion or the death of a family member. These events may trigger the need for change to your insurance policies. Life isn’t static, and your policies shouldn’t be either.
There is some relief as your children have become independent, your mortgage is smaller or completely paid off, and there will be less years of income to replace. Hence your insurance needs will decrease. If you’ve grown your savings and net worth to a sufficient amount, you may also be able to self-insure. If not, you should consider keeping a smaller amount of life insurance in place to cover income replacement and final expenses.
Now is the time to look into long-term care insurance. It provides a weekly benefit if you are unable to perform two of the six activities of daily living (bathing, transferring, feeding, toileting, dressing and continence) or suffer a cognitive impairment. It is designed to pay for care in a nursing home or for professional at-home care. These expenses can end up rapidly depleting your nest egg, leaving you and your spouse in financial trouble during retirement.
Since your income is now coming from your pension and savings, your death should not burden your spouse financially anymore. Therefore, as a retiree, life insurance is only necessary for final expenses, to leave a legacy or for charity. Since these are permanent needs, you can either convert a portion of your term insurance to permanent, or apply for a brand new policy. Depending on your net worth, you may also want to purchase a joint last-to-die policy with your spouse, which will cover the tax that is triggered on the death of the last surviving spouse. This will ensure that your estate passes on to your beneficiaries intact.
Your disability insurance should also have expired by now, as most policies only cover working individuals to age 65. If you haven’t replaced it with long-term care insurance, now is the time to do so. Your health can deteriorate rapidly as a senior, precluding you from being approved for it. Lastly, if your critical illness insurance policy is permanent, you will want to keep it in force, since a critical illness is more likely to occur as you age. Otherwise, a long-term care insurance policy can replicate some of the function of critical illness insurance.
As you can see, our insurance needs are constantly changing throughout our lives. It’s important for you to plan for these changes and minimize the risk of a financial catastrophe should something unexpected happen. Although it may seem like there are many policies, the key is to buy the right type of insurance at the right time. Doing so will protect you and your family from the risks that life presents, while saving you money on unnecessary insurance policies.