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WHY DO I NEED Life Insurance?
One of the most important reasons to purchase life insurance is to ensure your loved ones are provided for financially. Life insurance is also useful in helping your survivors pay bills and debts after your death, as well as for funeral expenses. It may be used for wealth accumulation and distribution as part of an overall financial strategy.
Typical reasons to purchase life insurance include
- Final Expenses.Medical bills, funeral expenses, and burial costs can add up quickly and usually cost thousands of dollars. Few people want to face their own mortality, but a life insurance policy will help your family handle these expenses after you are gone.
- Mortgage Protection.In the event of death, life insurance policies may be used to pay off outstanding balances on mortgages.
- College Funding.In the event of your death, your life insurance policy can help to pay for your children’s education.
- Income Replacement.When a couple plans to exist on two incomes, and the income is reduced to one because of death, life insurance policies can help. The death benefit paid to your spouse can help maintain the lifestyle to which she is accustomed.
Explanation of Life Insurance
Term Vs PermThere are 2 types of life insurance: temporary and permanent. Temporary (term) life insurance provides coverage for specific length of time based on your selection and permanent provides coverage for the entire length of your life.
|Coverage Period||Temporary, often expires at age 70 or 75,
depending on the term in the contract
|Lifetime Coverage||Lifetime Coverage|
|Premiums||Premium renews (increases) at each specified term.
(i.e. 5 years, 10 years etc.)
|Premium remains the same
for the entire contract.
|Flexible. Premiums can be increased or
decreased within certain limits.
|Death Benefit||Does not change and is guaranteed.||Does not change and is guaranteed.
Dividends may be used to increase
the face amount.
|Flexible. May increase or decrease due to
fluctuations in cash values.
|Cash Values||Usually no cash values.||Guaranteed in contract.||Some guarantees. May increase or decrease
due to investment returns and level deposits.
|Advantages||✔ Suitable for short-term needs, or a specific debt like a mortgage.
✔ More affordable. Initially less expensive than permanent insurance.
✔ Can be converted to permanent insurance without medical evidence up to
|✔ Provide protection for your entire lifetime─ if kept in effect.
✔ Premiums usually stay the same, regardless of age or health.
✔ The cash value in universal life policies can be used to continue
✔ Participating policies may receive dividends that can be taken in cash,
✔ Growth on additional deposits is not taxable unless withdrawn from the policy.
|Disadvantages||✔ At each renewal, premiums will increase and become more costly
as you get older.
✔ Coverage usually expires at age 70 or 75.
✔ With no cash value,if premiums are not paid, policy will terminate.
|✔ Initial cost may be too high f or sufficient amount of protection for your current needs.
✔ May not be an effective way of covering short-term needs.
✔ Cash values tend to be small in early years. You have to hold the policy for a
Term vs. Mortgage Insurance
A commonly misunderstood concept is the difference between mortgage and term insurance.
To give you a better understanding, mortgage insurance pays the balance of your mortgage to the bank if a person listed on the mortgage passes away. It pays off that loan so the liability of debt is not left on the people you live with and care about. This option may seem convenient in the sense that if you are already loaning money from the bank for your mortgage, you can purchase your insurance and roll it into your monthly mortgage payments. You are most often approved for this insurance by filling out a simple questionnaire which includes a few basic health questions.
Term Insurance does typically require a more detailed health screening where you may need to share a blood/urine sample and provide your doctor’s contact information. Depending on your age, smoking status and overall health, the premiums on term life insurance can end up being much lower than for a mortgage insurance policy. The difference in these costs typically becomes more pronounced as you age. Overall, term insurance tends to be a lot more affordable than mortgage Insurance and provides more guarantees with your coverage.
Ultimately, term life insurance is a smarter option. The key difference between the two options is this: mortgage insurance pays the remaining balance of your mortgage to the bank if you pass away; term life insurance pays the entire death benefit amount to your beneficiary. What this means is that the amount of your mortgage insurance coverage declines as you pay down your mortgage balance each month (without a corresponding decrease in premiums). With term life, the amount that your beneficiaries receive will stay the same throughout the life of the coverage because it is not tied to your debt.
Term Insurance vs. Mortgage Insurance Breakdown
|Do you get to choose the beneficiary?||Yes||No|
|Is the policy convertible?||Yes||No|
|Can you keep the policy if you get a new mortgage?||Yes||No|
|Are you in control?||Yes||No|
|Term Insurance||Feature||Mortgage Insurance through Lender|
|Your mortgage protection remains
intact even if you switch lenders.
|Portability||When you switch mortgage providers,
you usually need to reapply for your
|You own the policy and choose the
beneficiary you want to receive the
|Control||With typical mortgage insurance,
the lender owns the policy and assigns
itself as the beneficiary.
|Your coverage remains the same
even as your mortgage balance
|Level Coverage||Typical mortgage insurance declines as
your mortgage balance decreases, however
your premiums stay the same.
|You benefit from insurance underwritten
at the same time of the application.
|Comfort||Typical mortgage insurance is only
underwritten at the time of death.
|Your rate are guaranteed for the life
of the policy.
Benefits and Premiums
|Typical mortgage insurance rates
are not guaranteed.
- Is life insurance expensive?
- Many Canadians spend less than 25$ per month on a satisfactory life insurance plan. Ultimately as we age or experience adverse health problems, rates will increase. Therefore, it definitely makes more sense to buy a life insurance plan when you are young and healthy due to the cheaper cost and peace of mind that it brings.
- How do I have to pay for my life insurance policy?
- Insurers allow you to pay for your policy on an annual, monthly or weekly basis depending on what suits your needs.
- How much life insurance do I need?
- Generally the amount of protection you need is a combination of what it would cost to help your surviving family members and dependents meet their current needs (like taxes, food, clothing, utilities, mortgage payments, etc.) plus future obligations (like college and retirement funding) – minus the resources that your surviving family members could draw upon to meet those obligations (spouse's income, savings and investments, other income producing assets, and any life insurance you might already own).
- Can you cancel your policy?
- Yes you can cancel your policy at any time.
- Who can I designate as beneficiary?
- You can assign anyone to be your beneficiary. If you choose, you can have an individual, multiple people, a charity, a trustee, or your estate listed as your beneficiary. In the event that you don’t have a beneficiary listed, any death benefits paid out will go to your estate. If you are going to name a beneficiary, it is important to remember that you need to be clear about who receives the benefit and what he or she will receive.