- Geoff MacGillivray
Life Insurance, do I need it and if so what kind?
Updated: May 7, 2021
Insurance can be confusing and it’s hard to know what you really need or want. But here are three very good reasons why you need life insurance.
As we grow older, get married, build families and start businesses, we come to realize more and more that life insurance is a fundamental part of having a sound financial plan. Depending on your type of policy, life insurance is fairly cheap, which means there’s no excuse not to get coverage now. Plus, over the years, you’ll find comfort in knowing money will be available to protect your loved ones in the event of your passing. Here are a few other reasons why having life insurance is important.
TO PROTECT YOUR FAMILY AND LOVED ONES
If your loved ones depend on your financial support for their livelihood, then life insurance is a must, because it replaces your income when you die. This is especially important for parents of young children or adults who would find it difficult to sustain their standard of living if they no longer had access to the income provide by their partner. You will also need to provide enough money to cover the costs of hiring someone to cover the day-to-day household tasks, like cleaning, laundry, cooking, childcare and everything else a growing family needs.
TO PAY OFF DEBTS AND OTHER EXPENSES
In addition to providing income to cover everyday living expenses, your family needs insurance to cover any outstanding debts, like the mortgage, credit cards and car loans. Other expenses include funeral and burial costs that can easily run into the tens of thousands of dollars. You don’t want your spouse, parents, children or other loved ones to be left with any extra financial burden in addition to the emotional burden they’re already suffering.
TO BRING PEACE OF MIND
We can’t know when we’ll pass away. It could be today, tomorrow or 50 years from now, but it will happen eventually. No amount of money could ever replace a person. But more than anything, life insurance can help provide protection for the uncertainties in life. Without a doubt, having life insurance coverage will bring you and your family peace of mind. It’s one thing you can be sure of and you’ll no longer have to question whether they’ll be taken care of when you’re gone. Life insurance protects your heirs from the unknown and helps them through an otherwise difficult time of loss.
Term Life Insurance vs. Whole Life Insurance: What’s the Difference?
When you boil things down, you really have two options when it comes to life insurance —term vs. whole life. One is a safe plan that helps protect your family and the other one, well, it’s a total rip-off.
What Is Term Life Insurance?
Term life insurance provides life insurance coverage for a specific amount of time. If you or your spouse passes away at any time during this term (usually 20–30 years), your beneficiaries (those you’ve selected to inherit your money) will receive a payout from the term life insurance policy.Term life insurance plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you or your spouse passes away.A 30 year old could buy a 20 year term with $400,000 of coverage and it will only cost him about $20 per month
What Is Whole Life Insurance?
The premiums on whole life insurance (sometimes called cash value insurance) are generally more expensive than term life for a couple of reasons.Whole life coverage lasts throughout your entire lifetime. It might sound like a good thing to have life insurance coverage for your entire life. But here’s the truth: If you practice the principles we teach, you won’t need life insurance forever. Ultimately, you’ll be self-insured. Why? Because you’ll have zero debt, a full emergency fund and a hefty amount of money in your investments.Whole life insurance costs more because it’s designed to build cash value (which means it tries to double up as an “investment” account.) But keep in mind that a life insurance policy shouldn’t be an investment—it’s simply meant to provide security, protection and peace of mind for your family should the unthinkable happen."Life insurance has one job: It replaces your income when you die."There are far more productive and profitable ways to invest your money than using your life insurance plan. What sounds like more fun to you—investing into you own RRSP so you can enjoy your retirement or "investing" money in a plan that’s all based on whether or not you kick the bucket? We think the answer is pretty easy. A 30 year old would buy approximately $125,000 worth of coverage for $100 per month which will pay for insurance and savings.
Lets talk about 4 simple rules to how this “forced savings” really works
Rule #1You purchased a policy that pays for insurance and savings but the first 1-3 years there is a ZERO balance in your account.
Rule #2That account you are investing in makes very little interest 1%-2% if are lucky.
Rule #3Let's say you finally build up some savings in that account and you want to take out some of that money for an unforeseen expense. The insurance company will typically charge you 6-8% interest to borrow your own money. I have even seen policy’s that word “at a rate to be determined from us from time to time”
Rule #4You have been paying a premium to have life insurance and savings all these years and the unfortunate thing happens you a loved one passes. The beneficiary will only receive the face amount of the insurance policy not the savings account. Now lets go back to rule #3. What happens if you pass and you borrowed some money. Well like any loan it has to be paid back so the insurance company takes that off of the face amount. So if you had a policy that had a face amount with $125,000 of coverage and $20,000 in the cash value and you pass away your beneficiary will only get the &125,000 and not the $20,000. If you borrowed $10,000 of that cash value then the beneficiary will only get $115,000 as it was a loan.
How Much Term Life Insurance Do I Need and how long do I need it for?
You should purchase a term life insurance policy for 10–12 times your annual income. That way, your salary will be replaced for your family if something happens to you.Buy a policy with a term that will see you through until your kids are heading off to college and living on their own. That might be anywhere from 20 years if you already have children to 30 years if you don’t have children or aren’t finished adding to your family yet.A lot of life can happen in 20 years.Let’s say you get term life insurance when you’re 30 years old. You and your spouse have an adorable little two-year-old toddler running around. You’re laser-focused on paying off all your debt (including the house) and look forward to investing and retirement planning in the future.Fast-forward 20 years—you’re both in your 50s and that little pint-sized toddler is now a 22-year-old college grad. The years went by fast, didn’t they?But look where you are! You’re debt-free (the house and everything), and with your RRSP, savings and mutual funds, you’re sitting at a cool net worth of $500,000–1.5 million! The years were good to you, and it’s all because you had a plan.Since you were able to build up your net worth, you have peace of mind. At this point, (even without life insurance) if something were to happen to you or your spouse, the surviving spouse would be able to live off your savings and investments. Congratulations, you’ve become self-insured! When you become more financially secure, you have less and less of a need for life insurance.
LISTEN TO THE SHOW