The original purpose of Life insurance is to provide for your loved ones if you die unexpectedly. Over time, the reasons why people need life insurance coverage has evolved, with some people now using it for investments and estate planning.
The products have also gotten more complicated.
In this post, we’ll look at some of the more important and common reasons why you may need Life Insurance.
Common Reasons For Getting Life Insurance
1. Income Replacement for your family
The death of a spouse can be quite devastating, both psychologically and financially.
When someone dies “young”, their family lose out on their future income and may be unable to sustain the same living standards they were used to.
This is obvious for the higher-income spouse but not so for the lower-earning or stay-at-home partner. So many families underestimate the contribution of such partners.
Think about all the things they do for free, like child-care and cleaning.
How much will it cost to get the same services if they die, and how will it disrupt your current situation? Will you need to get another job that pays less but is more flexible, or leave a dream job to move closer to your home?
A life insurance coverage ensures that your loved ones can continue to live their lives, with little to no disruption.
2. Settle outstanding debts
With the average Canadian home having debts of over $1.7 for every $1 income, the death of a spouse can lead to significant financial stress for the surviving spouse and children.
The life insurance payout can be used to reduce or even pay off such household debts like car loans, mortgage and credit cards.
If your family may have to sell the house to pay off the loan, you should consider getting a life insurance.
Many people choose Mortgage protection insurance offered by their bank to address this risk, but the death benefit goes to the bank.
A life insurance coverage is almost always a better and cheaper alternative, and the benefit is paid to your family.
3. Final Expenses
Funeral costs and other administrative fees can quickly add up to thousands of dollars. Your death will be a sad event for your family, don’t make it an expensive one.
A death benefit to your surviving dependents will provide the needed cash to pay for all the unexpected expenses.
4. Pay for the education cost for your children
The cost of post-secondary education continues to increase – both the direct costs like tuition and indirect costs for things like accommodation.
Fortunately, the Registered Education Savings Plan (RESP) lets families save for their children’s education, with an additional grant from the government. However, this may not always be enough.
A life insurance policy will guarantee that the quality of education you’ve planned for your kids will not be out of reach because of finances when you are gone.
Related Post: RESP Guide for Beginners
5. Provide special care for a child
For families with kids with a disability or special needs, the death of a parent will result in significant changes.
Imagine a family with a special needs child: a parent works while the other stays at home to provide the necessary care.
If the working parent dies, the other parent may need to go back to work and arrange for alternative, and usually very expense, child-care.
And if the stay-at-home parent dies, the surviving parent may suddenly need to change their work schedule and look for paid child-care options.
6. Care for your dependent parents
If you have aging parents that depend on you for senior care, planning for their care if something happens to you is crucial.
No one wants to think about it, but our parents can outlive us. If you have other means to care for them, great! Otherwise, you need life insurance.
7. Estate Taxes
Without proper estate planning, your family may be forced to sell some of your assets to settle your tax bill at death.
This is especially true for physical assets like houses, cottage or antiques, but not applicable for investment portfolios (for example your stock positions in RRSP or TFSA).
While they can easily sell some stocks to pay off the tax bill on your stock portfolio, the same thing can’t be said for physical assets.
A life insurance policy, in this case, will allow them to keep the asset in the family – if that’s what they want.
Who Needs Life Insurance?
The decision to get a life insurance coverage depends on individual financial circumstances.
But in simple terms, you need life insurance coverage if your death will result in an economic loss and significant financial stress for your loved ones.
Even if you are in a similar situation as one of the reasons mentioned above, you may not need a life insurance coverage if you’ve been able to self-insure, that is you have significant savings and investments that your loved ones can draw upon if you die.
But it is always worth doing an assessment of how much coverage is needed for your family, compare to your existing coverage via other insurance (for example group life insurance through your employer) and your savings/investments, then determine if there’s a gap.
Related Post: Protecting your Loved Ones with Life Insurance
How to buy Life Insurance in Canada
In general, there are 3 main options for buying life insurance:
- Through an online insurance broker
- Through local independent insurance brokers in your area
- directly with an insurance provider
You should always compare quotes across the different insurance companies to make sure you’re getting the best deal. And the quickest and easiest way to do this is by using an independent life insurance broker.
Because they are not limited to any one insurance company, they’ll be able to provide you with several quotes for the type of life insurance you want.
In most cases, you should go with the insurance company with the cheapest quote; the products are quite similar anyway.
An example of a digital insurance broker is PolicyAdvisor.com.
Using the latest technology, PolicyAdvisor.com works with 20 of the largest life insurance companies in Canada to provide personalized quotes in minutes.
To get started, simply enter a few basic information then answer some simple questions to get a personalized coverage amount. You will be presented with quotes from different life insurers to compare and choose from. All done in a few minutes.
Alternatively, you can go directly to PolicyMe, an online life insurance provider with 10-20% cheaper life insurance rates compared to the bigger life insurance companies.
Check my full PolicyMe Review here to learn more about its offerings.
Protecting yourself and loved ones should be a key consideration in coming up with a comprehensive financial plan. If you’re still on the fence about getting Life Insurance, it is time to prioritize it.
And with the convenience of using a digital insurance broker like PolicyAdvisor.com, getting started has never been easier. So what’s your excuse?
Related Post: Guide to Canadian Life Insurance