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Is life insurance worth it in Canada?
This is a question that a lot of Canadian residents ask themselves when they are trying to determine whether they need life insurance or not.
You may be new to Canada or you may be someone who’s been a Canadian all your life but is transitioning into a phase where you have more financial obligations like starting a family or purchasing a home.
Life insurance can be a great way to financially protect your loved ones from the cost of death if something happens to you.
In most cases, life insurance is worth getting as there’s always a cost of death depending on when the person passes away and someone has to bear that cost.
For example, if you have young children and die suddenly, your partner will have to bear the costs of childcare, funeral, and other related expenses on their own.
On the other hand, if you are single or a senior when your children are grown, someone has to bear your funeral and interment costs.
Without life insurance, your loved ones are responsible for paying for these costs out of pocket.
Generally, you should get life insurance if:
You have young dependents who rely on your income to cover their basic needs like food, shelter, and education.
You have a partner or spouse who would be left with a significant financial burden if you were to pass away.
You have debt, like a mortgage, personal loan, or student loans, that your family would struggle to pay off if you died.
You own a business where your death could result in financial hardship for your partners or employees.
How Much Life Insurance You Need
In determining how much life insurance you need, many factors are taken into consideration. First, we must analyze your current financial situation.
- Are there people depending on your income, without which would encounter financial difficulties?
- Do you have outstanding debts or assets?
- What are your future goals?
- Are you planning to start a family?
- Are you planning to buy a home?
- Do you want to leave your estate to your family? Or do you want to give it to a charity?
Once you know the answer to these questions, we can design a life insurance policy that covers both your non-permanent and permanent financial obligations and pick the right life insurance type that works for you.
Who Needs Life Insurance in Canada
If you’re considering buying life insurance, the first thing you should do is look at your income, debt, and other financial obligations such as your children’s post-secondary education costs.
Many people have loans and mortgages and don’t want to leave a financial burden on their families. For this reason, most people consider debt when purchasing life insurance. This way, they can make sure their dependents aren’t left with a huge debt burden when they die. Also, life insurance is an excellent way to protect your spouse and children from the financial stress that comes with the death of a spouse or parent.
Life insurance is an important component of your overall financial plan. If you die unexpectedly, it can replace your income and help your loved ones live the same lifestyle that you’ve always provided them with aside from paying off any outstanding debts and any immediate expenditures that may arise as a result of your passing thereby providing you and your loved ones with the peace of mind that they are taken care of in case of the unexpected.
Who Doesn't Need Life Insurance?
A person who lives alone, has no dependents, and does not have any financial obligations, might not need life insurance. However, even if you’re single, you’ll want to make sure you have enough assets to cover end-of-life expenses such as funeral costs and taxes at death (if any) so as not to leave your loved ones with these financial obligations at death because either way, someone has to be responsible for these costs. Either you leave enough money to pay for the immediate cash needs that arise as a result of your death, or someone else like your bereaved family will have to pay for these costs. Life insurance takes away this financial risk from your loved ones. If you ever read about personal risk management, you will know that there are a couple of ways of dealing with life’s risks, either you absorb the risk, share it, or transfer it to someone else.
By buying life insurance, you technically transfer the financial risk to a financial institution such as a life insurance company so you or your loved ones don’t have to absorb the financial risk of death.
What Is Life Insurance
Life insurance is a contract between an insurer and a policyholder in which the insurer agrees to pay a designated beneficiary (or beneficiaries) a sum of money upon the life insured’s death. In exchange, the policyholder agrees to make payments into the policy.
There are two main types of life insurance policies: term life insurance and permanent life insurance. Term life insurance provides coverage for a set period of time such as 10, 20, or 30 years, while permanent life insurance provides coverage for the policyholder’s entire life. There are also several different riders that can be added to a life insurance policy, such as critical illness insurance, disability, or long-term care rider.
Term Life Insurance
Term life insurance in Canada is an excellent choice for many people. The premiums for term insurance are typically lower than those for permanent insurance, but they don’t provide coverage for your entire life and will tend to be more expensive when kept long-term because the renewal rates are based on your attained age at the time or renewal.
In contrast, whole life insurance will cover you until you die, regardless of what age it may come. Other types of permanent insurance include universal and term-to-100 policies, which give you coverage until you are 100 years old, but don’t build up cash values.
Permanent life insurance provides your loved ones with long-term financial security but term life insurance is far less expensive than permanent coverage at least during the initial term of the policy.
Term life insurance is much more affordable than permanent coverage, which is ideal for covering non-permanent financial obligations such as a breadwinner’s income, children’s education, mortgage obligations, and other debts that may be paid off at some point. To put it in perspective, term life insurance premiums are comparable to those of an extra-large pizza. This is one of the main reasons why 76% of Canadians opt for this type of coverage. If you’re not certain whether you’ll need life insurance, consider term life insurance at the least so you have some sort of coverage and convert part of it later on to cover your long-term financial obligations.
Permanent Life Insurance
One of the biggest benefits of permanent life insurance is the lifetime death benefit coverage for your beneficiaries. The only downside of permanent life insurance is that it requires a higher monetary contribution. You will contribute four or five times as much for a whole or universal life insurance policy compared to a term life insurance but unlike term life insurance, your contributions don’t go to waste because participating whole life insurance and universal life insurance helps you build equity in your policy over time.
Think of it like renting vs buying a house. With term life insurance, you’re simply renting your policy – it pays out if you as the life insured pass away during the term of your policy. When your policy term ends, you have the option to renew the policy or end the contract. When you die after the contract ends, your beneficiaries will not receive any death benefit, and you will not receive any cash surrender values at the end of your contract.
Participating whole life insurance and a properly funded universal life insurance allows you to build cash surrender values inside your policy, think of it like an equity build-up when you purchase a home. Aside from the lifetime coverage, you also build up wealth inside your policy, when you surrender your policy, you get paid the accumulated cash surrender value.
Is Paying Life Insurance Worth It?
If you’ve read through the previous sections, you would now have an idea as to whether or not life insurance is worth it in Canada and if it’s applicable to your specific situation.
Buying life insurance can be an excellent financial tool that can provide income for your loved ones when you no longer can, or at least pay off the immediate cash needs that may arise upon a person’s demise.
Most people believe that life insurance is worth it only when it pays out because they feel that the money they pay into the life insurance premium isn’t worth it. If you’re one of those who feel that paying into a life insurance policy is a waste of your hard-earned dollars, ask yourself if you feel the same way with your auto insurance.
A lot of Canadians actually feel that it’s worth it to pay their auto insurance because in case their vehicle gets damaged or written off, it can be repaired or replaced with a minimal cost to them. Also, partly because, in Canada, you can’t drive your vehicle if it’s not insured.
Unfortunately, there’s no government entity that requires life insurance in Canada but in reality, life insurance is far more important than auto or even home insurance because life insurance insures the most important asset that your family would have, which is you and your partner when you guys are at work.
If you or your partner would pass away prematurely, you can no longer provide the income that you contribute to your family’s financial stability, and this is where life insurance comes in to provide that much-needed financial support for your loved ones.
There are life insurance policies that help you build wealth while you’re loved ones are covered against financial difficulties in case of your untimely demise, which we’ll cover in the next section below.
How To Make Life Insurance Worth It
As you may already know, a life insurance policy can provide you and your family with financial security. While this type of coverage is not for everyone, it can be a necessity for people with obligations. There are several factors to consider when choosing the right policy that will work for you and your loved ones.
In this section, we’ll cover how you can make life insurance worth it through proper life insurance planning.
There are many types of life insurance, and each one has its pros and cons but participating whole life insurance and properly funded universal life insurance can help you build wealth inside your policy.
Participating whole life insurance lets your policy earn dividends on top of the guaranteed cash values, and this compounds over time. If you ever came across the infinite banking concept, you would know how powerful building wealth through whole life insurance is as the dividends your policy earns are never negative and are not dependent on market fluctuations. While you generally have to contribute more by participating whole life insurance, your contributions don’t go to waste as it helps you build wealth over time.
Similarly, a properly designed universal life insurance helps you build wealth long term, the only difference is that its rate of returns is dependent on the performance of your policy’s portfolio since universal life is an insurance policy with an investment component it lets you participate in equity and bonds portfolios that build your wealth over time as you pay into your life insurance policy.
While you contribute a higher amount to these types of life insurance policies, you’re not wasting money as you would with a term life insurance policy which only pays out when the life insured passes away during the term of the life insurance contract. Cash value permanent life insurance policies pay out even if you’re alive! By purchasing a cash value accumulating life insurance policy, you can make buying life insurance worth it in Canada.
If you want to learn more about how you can make life insurance worth it for you and your loved ones and how you can build wealth through life insurance, please don’t hesitate to book a time with us at your most convenient date and time.