Life Insurance
If there is anyone relying on you financially, you need life insurance. The day that you die, your income stops. But your dependants will still have to pay for your mortgage, groceries, heat and all of the other bills. Life insurance should replace your contribution to the household budget for as long as your family needs it to. For example, if your family needs you to cover at least $2,800 a month of household expenses to maintain their lifestyle for the next 20 years, you would need $500,000 of life insurance coverage, assuming a 5-per-cent after-tax rate of return and 2-per-cent inflation.
People have the greatest need for life insurance early in their adult lives when there are minimal financial assets coupled with high costs, such as child care, and significant debt, such as a mortgage. The unexpected death of a spouse at this stage of life would be financially devastating. Conversely, a retiree likely has substantial financial assets in investments or pensions, independent children and minimal debt. The death of a spouse at this stage of life would have less of a financial impact. It is important to review every situation carefully though, as everyone has unique needs.
There are two main types of life insurance: term insurance and permanent insurance. Term insurance has a guaranteed premium (cost) for a fixed term, usually 10 or 20 years. Several insurance companies have term solutions that range from 5 years to 40 years. After the term has expired, the premium goes up, often substantially. If the insurance planning was done well, your life insurance need at the end of the term will be minimal, and you can cancel the policy instead of paying the higher renewal rates.
Permanent insurance has a fixed premium forever, but it is more expensive. Permanent insurance may seem expensive when you compare it to term insurance, but over a longer period of time it can actually be far less expensive. Permanent insurance can make sense for tax and estate planning as it will be there exactly when you need it.
There are multiple forms of permanent insurance. The simplest form is Term 100, which is like a term-insurance policy that has a fixed premium until the age of 100. Whole-life insurance is similar in that it is payable with a fixed premium until 100, but it also has a cash value building up in the policy over time. You can borrow against the cash value, or use it as collateral for a loan, and you keep the cash value if you cancel the policy. In most policies, the cash value also earns non-taxable interest over time. Limited-pay whole-life is similar to whole life, but the premiums only need to be paid for a fixed number of years, and then the policy is guaranteed until death. Universal life insurance is another form of permanent life insurance that offers lifelong coverage as long as you keep making the payments. It is one of the most flexible types of permanent life insurance. Unlike term life insurance, a universal policy does not expire at a certain age, nor after a predetermined number of years. It offers key financial planning features such as lifelong protection that never expires and opportunities for tax-preferred savings growth.
Disability Insurance
Like life insurance, if you are earning an income and have anyone relying on your income, you need disability insurance. You are far more likely to become disabled than you are to die prematurely. Personally owned disability insurance can often be hard to get. The underwriting process – the process where the insurance company decides how risky you are – is rigorous.
On the other hand, many employers will offer disability insurance as part of their group benefits package. Group disability insurance is much easier to qualify for, but it will typically only cover you for two years of “own occupation” – this means that the benefit continues to pay for two years if you can’t go back to your own occupation, but it goes away after two years if you can go back to a different, potentially less desirable, occupation. Group disability insurance also often comes with a maximum non-medical qualification amount.
Most plans will pay if you are unable to return to any type of work, typically pay to the age of 65 (or to the end of the benefit period which is sometimes 5 or 10 years).
Generally, if you are in a specialized field or earning an income that is greater than the maximum amount covered under your group plan, it makes sense to have your own disability policy. You need to have an income to insure in order to qualify for disability insurance.
Critical Illness Insurance
Critical illness insurance pays you a lump sum if you are diagnosed with a covered illness; there are typically 25 or 26 of them, including heart attack, stroke and cancer. You should consider critical illness insurance when there is adequate life insurance and disability insurance in place first.
Most Canadian insurance companies offer Critical Illness (CI) insurance. Just like with life insurance, you can obtain CI as term insurance or permanent insurance. Term insurance is generally offered in terms of 10 and 20 years. Permanent coverage typically comes in policies that are to age 75 or 100 (some companies offer a solution to age 65).
