Life Insurance FAQ

December 12, 2018
FAQs

You have questions.  We have answers. Life insurance, explained.

What is life insurance?

Life insurance, simply put, is insurance that will pay out a death benefit (lump sum of money) to a beneficiary (person you name who you want the money to go to) upon the death of the life insured. The cost of life insurance varies based on a number of factors, such as, the age of the insured, smoking status, current health, and expected life expectancy. In exchange of premiums paid (monthly or annual payment made to insurance company), the insurer guarantees to pay a set amount of money to your beneficiary if you pass away during the life of the policy.

What does life insurance cover?

Life insurance is a cash payment that can be used to cover any expenses that you leave your family behind with.

  • Mortgages
  • Future education expenses for your kids
  • Living expenses for your family to maintain current lifestyle
  • Child care expenses if you have young children
  • Final expenses (burial, estate taxes, etc)

In short, life insurance covers off so many things, many people have different level of coverage they will need during different periods of time, some with an expiry date and some that are permanent needs.  This is why you should discuss with your advisor the different life events that will bring on different needs and what applies to you.

How much coverage do I need?

It depends. Don't you love hearing that?  The truth is everyone's situation is unique and will need to be looked at individually. A general rule of thumb to give you an idea of what your minimum needs are (emphasis on minimum) is to add up all your long term debts and financial obligations and then subtract any savings, investments, or assets you have. Your minimum coverage should be the amount that covers that gap.

Here are some key questions to ask yourself when considering your coverage needs:

  • Who depends on me financially?
  • If I passed away, what annual income would my family need to maintain their lifestyle?
  • How much debt do I have right now? (mortgage, car loan, credit card)
  • My kids are probably going to want to go to school, how much is that going to cost?
  • What life insurance do I have through work? How could my other savings and investments help if I passed away?
  • What other income does my family have right now?  How would they pay the bills?

What is the difference between term and whole life (permanent)?

Term life insurance is the most popular and affordable.  Although, everyone should consider at least a portion of permanent insurance as everyone has a permanent need for insurance. The beautiful thing is you can combine term and permanent insurance into one policy. Term insurance provides life insurance coverage for a specific number of years, usually 10-25. Premiums are guaranteed, meaning you pay a fixed premium, either monthly, or annually, to keep your policy active and in force. If you pass away during the term of your policy the insurer pays a death benefit (the predetermined coverage amount).

Ideally, you will align your families need for coverage with the term of your policy.  The need for covering these risks, such as your mortgage should end with the end of the term policy.  As stated, there is always a permanent need to cover risks such as final expenses, estate taxes, and any money that you want to pass on to loved ones, and as such, a portion of your policy should be a permanent policy. This will ensure that, when the majority of your risks end, the majority of your coverage will end, but you will still have a small amount of coverage in place when you outlive your term policy that will continue on until your death.

Permanent (whole life) insurance provides protection for life. The premium remains the same and coverage amount is guaranteed no matter how long you live. Since it never expires, the annual cost is significantly more expensive than term but these policies also carry a cash value, where term coverage does not. The cash value can be taken out of the policy, used as collateral for a loan, or used to pay premiums for the policy.

What type of policy should I buy?  Term or permanent?

It’s impossible to say, because the kind of coverage that’s right for you depends on your circumstances and financial goals. But, as stated it is highly recommended that you look at creating a plan that utilizes a combination of both. Term offers the greatest coverage (death benefit) for the lowest initial premium and is a great solution for people with temporary needs or a limited budget. Permanent insurance on the other hand, may make more sense if you anticipate a need for lifelong protection, or if the option of accumulating tax-deferred cash values is attractive to you.  Often, a combination of term and permanent insurance is the right answer.

Isn't the life insurance I have through work enough?

Straight up, probably not. Group policies are usually not individualized (check out our digital benefits page if you want coverage for your workplace that is customizable), meaning the coverage is usually set at a certain level, or 1x or 2x salary.  This is usually much less than the actual need for families, or even individuals. Although a multiple of salary is only part of the whole picture and you should have a thorough needs analysis done by an advisor, most people say your coverage should be 10-15x your salary.

I already have a policy.. does it make sense to replace the policy I have?

Again, it depends.  It may make sense, premium wise, or coverage wise to rework your existing policy into a new one.  Or you may be better off getting a separate policy all together - yes, you can hold more than one policy. The new policy can either replace your existing policy or be in addition to your existing policy.  It all depends on your individual situation and what will be best for you, the insured.

Who should I name as my beneficiary?

Consider the following when naming your beneficiary(s).

  • It is common practice to name a contingent, or secondary beneficiary, in case you outlive the beneficiary you have designated
  • Selecting a beneficiary is always better than naming your estate as the beneficiary. If your estate is the beneficiary, the funds will have to go through probate with the rest of your assets. You can also name multiple beneficiaries and allocate specific percentages to each of them.
  • You can change your beneficiary (as long as it is not irrevocable), but you have to remember to do so.

What are these things called riders?  And why should I consider them?

Should you add riders to your policy?  Again, it depends. It depends on your individual situation and your advisor will be able to help you understand whether a rider applies to you and would be a good option for you. Here are some common riders you should be aware of:

Disability waiver of premium rider. This rider stipulates that if you become totally disabled for an outlined amount of time, you will not have to pay your premium but your insurance policy will still remain active.

Accidental death benefit rider.  This rider will pay an additional benefit, on top of the death benefit, if your death is the result of an accident.

Child protection rider. This rider allows you to add the life of your child onto the policy.  Usually coverages range from 10k-30k, and allow you to insure your children on your policy for a small monthly premium.  We do recommend that you look into a whole life policy for your children as this can be a very effective alternative to an RESP, with less restrictions on the use of the funds.

Did we miss anything?  Let us know.

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