You already know you need life insurance because all the real grown-ups have it. But maybe you’ve procrastinated getting it because the whole process seems complicated and overwhelming.
Not to mention, trying to figure out what type of life insurance is right for you and how much coverage you need can feel like a one-way ticket to stress city – the migraine is included, but the Advil costs extra.
You can stop massaging your temples because we’ve got great news for you! Shopping for the best life insurance policy for you has never been easier.
With online comparison tools that connect you with providers, choosing the right type of life insurance for your needs is almost as easy as ordering pizza.
You just need to understand the basic types of life insurance so you can choose the right kind of policy. We’re here to help you so you can shop with confidence.
What Is Life Insurance?
If you understand how car insurance works, you’ll understand the basic principle of life insurance too.
It is a legally binding contract between you and a provider that states as long as you pay your premiums, the provider will pay a specific amount of money to your beneficiaries if you pass away. So long as the nature of your death is covered under the policy. All life insurance policies outline the causes of death they will or will not cover.
Who Are My Beneficiaries?
Pretty much whoever you want them to be. You can name anyone you care about, who may be affected by your death, as your beneficiary. For many people that would be their partners or children. But it could also be a sibling, best friend, business partner or even a Non-Profit Organization.
Why Should I Buy Life Insurance?
Well, if you care about the financial well-being of the people you love, then you should buy life insurance.
If you have small children or children with disabilities, life insurance will provide the necessary financial support to meet their needs and maintain their standard of living.
You will also want life insurance if you share property with someone, have a high net worth that could incur estate taxes, or if your family would not be able to afford the cost of a funeral.
You should also get life insurance if you are young and healthy so you can lock in the lowest possible rates.
While there are countless reasons to take out a life insurance policy, the most important one is to protect your loved ones from any financial trauma caused by your death.
Who Sells Life Insurance And Where Can I Buy It?
There’s no shortage of insurance providers or policies to suit even your most obscure needs. There are well over 32 life insurance providers in Canada alone. There’s a smorgasbord of coverage options more customizable than your annoying Starbucks double-tall, non-fat, extra foam, decaf latte with sweetener on the side.
So where are these insurance providers and how can you buy the perfect policy?
Look no further than the device you’re reading this on. The perfect policy is only a few clicks away.
We suggest using an online insurance provider, like PolicyMe. They’re a web-based insurance company on a mission to make life insurance more accessible to Canadians like you. And since they’re a bonafide insurance provider, not a broker, you’ll get the coverage you need at the best possible price.
PolicyMe is your one-stop-shop for calculating how much coverage you need, the right type of policy for your situation, instant online quotes and transparent service.
What Is Permanent Life Insurance?
Permanent life insurance can also be called whole life insurance, and it does exactly what the name suggests – covers you for your whole, entire life.
Unlike term insurance, there is no maximum age at which you are no longer covered and it never expires. While many providers offer no-medical-exams policies, the more coverage you ask for, the more likely you will need to submit to an exam or at least a health questionnaire.
Of course, since the insurance company knows they will eventually take a loss on you when you die, the premiums are quite a bit higher than term policies with comparable coverage.
Most permanent life insurance policies provide constant premiums throughout the life of the policy, guaranteed to never increase. Having said that, there are some permanent life insurance policies that offer adjustable premiums, in which case, your payments could fluctuate over time.
Permanent life insurance is a great option for you if you want long-term protection that will cover the cost of your funeral, help shelter your beneficiaries from estate taxes and give you peace of mind knowing your loved ones will be taken care of no matter when you pass away. It’s also a good option for those who want a consistent payment that won’t change even as they age or if their health status deteriorates.
Most permanent life insurance policies also offer something called a cash benefit or value. It acts kind of like an investment portfolio that grows as you make your payments. Some will let you borrow the available funds from within the policy or let you use it to secure a loan. Keep in mind that whatever you withdraw or borrow from your policy will reduce the death benefit payout to your beneficiaries.
What Is Term Life Insurance?
Term life insurance is the opposite of permanent life insurance and only covers you for a specific period of time, anywhere from 5 to 30 years or to a specific age like 85.
Since term life insurance does not cover you indefinitely until you die, the policy will likely expire before you pass away. The provider is far less likely to take a loss on your death which makes the insurance premiums much cheaper.
Like with permanent insurance, the more coverage you ask for then the more likely you will have to submit to a health exam. In which case, your health status will dictate how much your premiums will cost. So for some people, term insurance isn’t always cheaper depending on their current health status and how much coverage they’re asking for.
Like permanent life insurance, the payments will remain the same throughout the term you’ve chosen. While term insurance is cheaper than permanent life insurance at first if you choose to renew after your term expires you could get hit with higher premiums.
The older you are the more likely you are to experience serious health issues which affect your level of risk in the eyes of the insurance providers. The older you are, the more life insurance costs, period. And if your health condition has worsened since your original term, you’ll get charged more for that too.
Having said that, there is quite a bit of flexibility with term insurance. If you renew, you can adjust the amount of coverage to suit your changing needs and budget.
Most term policies will let you convert to a permanent policy at the end of the term. While the premiums will still be higher, at least they will be locked until you die. For a lot of people, this option is still quite a bit more cost-effective than renewing a term policy multiple times.
With a term policy, there is no cash benefit. You won’t be able to borrow against the policy or access any equity you would have accumulated by paying your premiums each month as you would have with a permanent cash value policy.
If you renew your term policy, you’re still paying higher premiums even if you don’t reduce your coverage. Think of a permanent life insurance policy like buying a house, whereas a term policy is more like renting.
Which One Is Right For Me?
Permanent life insurance is a good option for those who want lifetime coverage with a guaranteed payout for their beneficiaries. It can also be a great investment tool to help you grow your net worth if you choose a cash value plan.
If your long-term goals are to accumulate wealth and leave a sizable estate for your heirs, then a permanent life insurance policy can help cover the larger tax bills that come with estates and inheritances.
You should also consider permanent life insurance if you have long-term, persistent financial commitments that would be impacted no matter when you die such as a spouse with a long-term chronic illness or a child with a disability.
Term Life Insurance is a preferable option for those with young families when expenses and debt balances tend to be considerably higher. It is less expensive initially which is good for those just starting out in their careers, juggling student loans and starting families.
The premiums are lower and remain the same throughout the term which offers an affordable option during the period of your life when most people have lower incomes, fewer assets and more debt.
It’s also a great option for those who are self-employed or own their own business and only need protection for a period of time, like during their prime working years
How Much Life Insurance Coverage Do I Need?
After deciding what kind of policy is right for your needs, the second biggest question is how much coverage you need.
What you need will depend entirely on your specific circumstances. It’s not a one-size-fits-all type of decision.
Even if your friend or neighbour is in the same stage of life as you, you cannot base your decision on what someone else has or how much they’re paying.
The amount of coverage you need will depend on how far you are from retirement, how much debt you’re carrying, how many dependents you have and your annual salary.
Ideally, you want enough to cover your funeral expenses, pay off all your debts, replace your salary for the numbers you had left until retirement, cover any education plans for your dependents and enough to cover inflation.
If you can’t afford a policy that would replace your income until you have retired, then you need to at least decide how many years your salary would need to be replaced in order for your loved ones to maintain their standard of living.
A quick calculation to determine how much coverage you probably need should look something like this:
$ Funeral Expenses
$ Mortgage Balance
$ Other Outstanding Debt
$ Children’s Education
(Your Net Annual Income x Number Of Years You Want To Replace Your Income)
= $ Amount Of Coverage You Need
Say you and your partner are in your mid 30’s with two small children. You both need to work to cover the cost of living and provide for your family. A funeral in Canada costs anywhere from $5,000 to $10,000, so let’s split the difference and assume it will be $7,500.
You are homeowners with $300k left owing on your mortgage and you each make the average Canadian salary of $52,000 a year. If you live in Ontario, for example, that makes your net income roughly $40,568.
You’ve decided you want to replace your salary long enough for your children to graduate high school. Your youngest child is 5 so you need your salary replaced long enough to cover them from kindergarten through grade 12, that’s 13 years. You also have $31,000 of student loans left owing, a car with $23,000 owing and a few credit cards totalling about $7,000. You’d also like to leave enough to pay for your children to attend university or college, and the average cost of a university degree is about $30,000.
Your coverage calculation should look something like this:
Student Loan: $31,000
Credit Cards: $7,000
(Net Income $40,568 x 13 Years): $527, 384
How Much Does Life Insurance Cost?
Life insurance premiums are highly subjective to your specific situation and extremely discriminatory. Yes, you read that right, discriminatory.
The insurance industry is one of the few industries that are allowed to charge significantly different prices for the same product. It all comes down to risk. If their assessment tools rate you as someone at increased risk of death, then you will be charged higher premiums because the insurance provider is more likely to take a loss on you.
You will be charged higher premiums for things like your age, gender, general health, smoking status, nature of your job and your hobbies (to name a few).
That means someone else of the same gender and age as you could be charged a lot less if their health status or lifestyle deem them less of a risk.
If you were to choose a 20-year term policy, assuming you are a 30 year old non-smoking female living in the Greater Toronto Area, your premiums would range anywhere from $11.25 – $130 a month.
Men are typically charged 10-25% more than women, and smokers are generally charged 50-100% more than non-smokers
Unless you’re Edward from the Twilight Series then you absolutely need life insurance. It doesn’t matter if you’re married or single, kids or no kids, carrying debt or financially free.
If you have loved ones who would face financial hardship if you suddenly passed away, then leaving a financial cushion for them is the compassionate thing to do. Even if it’s only enough to cover the cost of your funeral.
And while shopping for insurance used to be a painstaking task, it isn’t anymore. There are many online comparison tools and brokers to help you get started and guide you through the process, regardless of the complexity of your situation.
The perfect insurance policy for you is already in the palm of your hand.