My wife and I decided to get life insurance shortly after buying our first house and before having our first kid. The timing made perfect sense to us - for one, we’d committed to working together to build an asset that neither of us could afford on our own. Secondly, we’d fully intended on making some new dependants and, if something did happen to us, we wanted them to be financially protected after we were gone.
There are a few factors to consider when determining the right time to invest in life insurance - here are a few questions to ask yourself:
Term vs. Whole Life
First, a primer on the differences between the two basic types of policies: term and whole-life plans. As the name suggests, term life insurance plans are set up for a set period of time – the term – typically in five or 10 year increments. Once you determine the amount of payout you’d like and the insurance agent or broker runs your vital stats (age, occupation, family medical history, whether or not you smoke, and so on), you’ll get a set monthly premium that stays the same for the duration of the term. If you die before the term expires, your named beneficiary will receive a tax-free payment in the amount you’ve agreed upon. If you outlast the term, congrats on your good health!
In most cases, you can extend the policy for a further term but, given that you’ll now be 10, 20, or 30 years older than when you first signed up, your monthly premiums will be significantly higher.
A whole life (also known as a permanent plan) covers you for just that: until the day you die. Sounds like a no-brainer, but there are a couple of catches. For one, monthly premiums on whole life plans are significantly higher than those for term plans.
Insurance As An Investment
Whole life plans also include an investment component, meaning you build up equity as long as you keep making your monthly payments. But, as most financial advisors (who don’t work for insurance companies) will tell you, the management fees and other costs built into the investment portion of a whole life insurance plan are far higher than what you’d pay for RRSPs, mutual funds, or other retirement investments you seek out separately.
Determining Your Coverage
How much do you need? That’s a judgment call. If you were to drop dead today, how much would you want to leave for your family? For my family, having enough to pay off the mortgage, plus a little extra, struck the right balance of sufficient coverage with affordable monthly premiums.
What's The Right Time?
When should you get insurance? Again, it’s up to you and your situation. If you’re single and just starting out in your career, it makes more sense to put your discretionary income towards RRSPs or savings for a down payment to safeguard your own future than to invest it in a plan that only kicks in after you’re gone.
But once you’ve found that special someone you’d like to settle down with and/or start a family with, life insurance should be a key point of discussion in one of your big talks.
Thinking Beyond Life
Life insurance is really only one part of the insurance equation. In some cases, a serious injury or illness can have an even more devastating emotional and financial impact on a family than the sudden death of a breadwinner. Even with Canada’s healthcare system, non-covered medical bills can add up while income concurrently goes down with the sick person and their family at the hospital rather than on the job.
“In my opinion, disability coverage is one of the most important benefits an employer can offer,” says Joanna Matsoukas, a Toronto-based human resources expert with more than 15 years in the industry. And, if you’re self-employed, she can’t stress enough the importance of have short-term and long-term disability coverage.
Insuring Your Kids
I’m knocking feverishly on my wooden desk as I type out these words but, as a parent, you should also consider taking out life insurance polices on your children. There are at least two very good reasons why. First off, if the unthinkable did happen and a young child dies, imagine the impact it will have on your life. Do you think you’d be able to go back to work right away? If you’re self-employed, your business could flounder or even fail outright while you’re coming to terms with your grief. An insurance policy could help cover funeral expenses and provide a buffer until you’re ready to rejoin the workforce.
The other benefit of insuring children is that you can pass along a policy (particularly if it’s a whole life plan) to the children when they’re older, enabling them to take over the policy without having to endure any medical checks or other screening. That’s precisely what my parents did with the policies they’d taken out on my brother and I.