What is Life Insurance Anyway?
What is life insurance anyway? This question brings to mind the 1983 Howard Jones song, What Is Love Anyway…
…despite dating myself there’s a good point here. Life insurance provides a financial safety net for those you love. Thinking about the financial details that will cause your family stress BEFORE you pass away is an act of love.
There are many ways coverage can be used to help avoid serious pitfalls or even bankruptcy.
So why not grab a cuppa coffee, while I go through the ins and outs of life insurance and how it can help you create a better future for generations to come.
Life Insurance Is a Contract
First and foremost you should understand that when you apply to a life insurance company for a specific product and they offer you the coverage – you’ve entered into a contract.
- All of the details of your coverage are outlined in your “Policy” and when you sign it, the protection is in force. This means the life insurance company has a legal obligation to pay out if you’ve met all the conditions of coverage.
- In exchange for your “Premiums”, or the money the life insurance company receives to keep your coverage in force, the insurer agrees to pay a death benefit should you die before the coverage expires. Premiums more times than not are paid monthly but you can also opt to pay them bi-annually, yearly or in a lump sum to save some cash (often you’ll be given a discount for paying upfront)
- A “Death Benefit” or “Face Value” is the agreed-to amount of money the life insurance provides your beneficiary. Death benefits typically are offered in the following increments: $100k, $250K, $500K, $1Million.
- The “Beneficiary” is the person, people or charity you select to receive the death benefit.
- If you select “Term Insurance” then the coverage is provided for a finite period of time or a “Term”. Terms are typically purchased in the following increments: 10 years, 20 years, 30 years or 40 years.
- Term Insurance typically required a medical exam but there are other options like simplified and guaranteed issue which allow you to skip the needles and urine collection.
- If you select “Permanent Insurance” you are covered until the day you die as long as you keep up with your premiums.
- Permanent insurance typically has a “Cash Value” component. Which means cash builds up in your policy that can be borrowed against in your lifetime. Permanent insurance comes in many packages that include investment options. If you are interested in permanent solutions you should speak to an independent agent. It’s more expensive and complicated than term.
Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder. Guide to Life Insurance, Investopedia
Why You Need Life Insurance
Now that we have that out of the way – it’s important to assess WHY you NEED life insurance.
A good place to start is by asking yourself this question: If I’m not here tomorrow, are there people depending on me who will be in serious financial distress as a result? If the answer is “yes”, you need life insurance.
If you have a mortgage, debt, and/or dependents then life insurance coverage is a no brainer. What would happen if your income disappeared permanently. Remember, when you die, your income dies with you.
Maybe you live in a dual-income home and aren’t too worried – but when you do the math you’ll see even if your income is not primary, a loss has far-reaching repercussions…
….and if you’re loved ones are dependent on a single income then it’s even more important to get real.
Life insurance is a versatile product and can be used for much more than income replacement. Let’s take a quick look at some of the creative ways coverage can be used now!
Creative Ways to Use Life Insurance
- Income Replacement: This is the reason most people buy life insurance. Typically term fulfills this need.
- Final Expenses: When you die your financial obligations do NOT evaporate. Final expense insurance provides the funds for your loved ones to pay for the funeral and any outlying debt that has to be satisfied. These are typically permanent plans with smaller face values. I love this product because it’s affordable and simple to apply for.
- Business Purposes: This is a lot more complicated. Life insurance can be used for many reasons to protect partners from the death of key personnel, to protect employees…even to recruit high caliber employees. Term and/or Permanent products can be used depending on need.
- Charitable Giving: Did you know you can leave your life insurance policy to a qualified charitable institution? Another perk? It’s a tax write off for your estate. These are permanent policies.
- To Make Sure the Family Cottage Carries On: Taxes on properties that aren’t primary residences hit hard. So to defray this obligation often people purchase a policy to cover those bills. This would be a permanent policy.
- As a Tax Shelter: If you have enough cash and have exhausted all traditional means this is a good place to put your money. These are permanent policies.
- To Leave Money for a Child with Special Needs: As you know financial obligations for children with special needs continue after your death. You can create a trust to be funded by a life insurance policy. These instruments are set up with permanent policies.
How Much Life Insurance Do You Need?
The first step I ask my clients to perform is a needs analysis. This provides the information they need to make an informed decision about how much coverage they need and can afford.
To give you an idea we recommend minimum 7 – 10 times your gross monthly income. If you have young children, it should probably be closer to 15 times. It may sound like a lot but remember these funds are needed over a period of many years for most.
You also have to factor in wage increases, cost of living increases and your goals.
How Long Do You Need Life Insurance?
Another big issue is timing. How long do you need coverage?
This question isn’t as straightforward as you might think. For most families they are looking for a safety net for their most vulnerable years (term insurance).
For others they want to leave a nest egg to their family (permanent insurance).
Remember life insurance is most affordable when you are young and healthy. So if you opt for a shorter term and find you still need coverage this could work to your detriment. I have clients that thought they’d be out of debt in 20 years only to find that’s not the case.
Now they are applying for more coverage – but they are two decades older with more health issues.
One of the most important parts of insurance planning is thinking ahead and considering the fact that life doesn’t always unfold as we predict.
These Decisions Are More Important Than You Know!
When you purchase a life insurance policy you can go down two different paths. The first is contacting an insurer or financial institution directly. Maybe you heard that RBC is a terrific company so you give them a ring to buy a policy…
If you call a tied agent or bank representative, you will only get information about the company you contact. Tied agents are only able to sell their employer’s products.
Hey if it’s a great insurance company. What’s the harm? They are all pretty much the same right?
Different insurers offer different products and specialize in specific niches. For example, some insurers are more lenient for Type 2 diabetes than others. Chances are you don’t know which ones.
That’s where an independent agent comes in. We have access to the best life insurance companies in Canada and provide you with all the info you need to save time and serious cash.
Keys to Finding the BEST & Most Affordable Coverage
The keys to getting the best possible policy are:
- Using an independent agent that helps you select the RIGHT carrier for your specific needs
- Selecting the correct type of coverage. Term works for most people most of the time…but there is a time and place for permanent plans. For example, I really like final expense products and they are affordable…BUT are larger whole life policy works only for those with expendable income.
- Knowing what your goals are and picking the right term and face value. So many people cheap out when it comes to life insurance. You don’t want to be caught without coverage in a time when you need it most and being underinsured is also a recipe for disaster.
Picking out a knowledgable and independent life insurance agent, like those at Policy Architects AND doing your homework saves you thousands over the course of your term.
What is Life Insurance Anyway? What Happens When You Die
An article answering the question: what is life insurance? would not be complete without discussing what happens when you die.
I think a lot of people are concerned that life insurance companies don’t pay out. Well I am here to tell you that’s not the case.
Life insurance is highly regulated in Canada and insurers know if they pull any funny business they will be held accountable.
That’s not to say that claims always go off without a hitch.
Fraud & Leaving Out Information Complicates Claims
Lying on your life insurance application will NOT help your family. I think some people believe they can hide medical issues to get a better rating.
Nope. Insurance companies are good at sniffing out this sort of behavior and if they find out you lied on your application your family likely won’t see any money.
Another issue that can result in an investigation that holds up your claim or results in denial is leaving out important information.
Let’s say you forget to tell your agent about your occasional smoking habit. If your life insurance company gets wind of this they may deny the claim. Even if smoking didn’t contribute to your death.
The moral of the story? Be sure to be candid about everything – even the smallest and seemingly most insignificant details…and whatever you do don’t lie. It’s fraud.
Beware of the 2 Year Contestibility Period
& 2 Year Waiting Period Connected to Guaranteed Issue Insurance
Let’s say you die within 2 years of purchasing a life insurance policy. Did you know that life insurance companies have the right to investigate the claim.
This is to protect them from fraudulent applications. They want to make sure that you didn’t misrepresent the state of your health or lifestyle to obtain coverage.
In cases of suicide during this period claims will automatically be denied.
After 24 months it’s almost impossible for a life insurance company to contest a payout unless there is something to the contrary in your policy or they can prove you did something fraudulent.
Please note: A CBC News investigation has found that leading insurers such as Manulife, Desjardins, SunLife and Great-West Life, among others, can deny coverage for costs associated with attempted suicide or intentionally self-inflicted injuries. Suicide attempts and insurance: Why you might not be covered, CBC
Some companies are much better than others when it comes to customer service and administration. This is another reason to do your homework.
While it’s rare that a claim is denied or contested unless it falls withing the 24 month period discussed above – delays do occur.
When you are in mourning and your creditors are knocking at the door, the last thing you want is to wait for months and months to receive a check.
For the most part, once the proper documents are submitted, beneficiaries receive their checks one-two weeks after they file their claim.
The Importance of Selecting the Right Beneficiary & Keeping the Info Up to Date
Take care when you select your beneficiary.
First and foremost do NOT choose a minor without designating a Trustee. This will leave your child in limbo and they may not have access to the proceeds of the claim until they turn 18. This will result in all kinds of administrative issues.
Unless your life insurance is part of divorce or legal agreement, always select your beneficiaries as “revocable”. This will allow you to make changes if necessary by filling out and signing a simple change of beneficiary form. If you tick the box “irrevocable”, you have to get your beneficiary to sign off on any changes. This may not seem important but I’ve heard horror stories firsthand of clients trying to track down a beneficiary half way around the world in order to execute a change of beneficiary on their life insurance.
You should also regularly review your beneficiaries. People die and circumstances change. For example, ex-wives and husbands have erroneously received death benefits because someone forgot to keep their records up to date.
What is Life Insurance Anyway? It's LOVE
What is life insurance anyway? Well, in my opinion, it’s love. Providing your family with a safety net is an act of responsibility and care for circumstances you aren’t there to fix.
Life seems like it will go on forever – but the truth is we are all very mortal. That dawned on me when I had my son. The fragility of the world around has never been so pronounced since I had a child.
Currently, I am the primary breadwinner so I have coverage to make sure that if something happens to me, my family can stay in the house and continue to live the life we’ve made together.
If you are interested in finding out more about life insurance coverage give me a call today. My advice is free and I enjoy helping clients thought this very important decision.