Life insurance isn’t an easy thing to talk about. There are probably innumerable things that people would rather do than discuss insurance, such as laundry or dental work. Even those with life insurance told a TD Insurance survey that they think it’s too complicated or they’re bored with it. “It can be overwhelming,” Dave Minor, vice-president of retail and wealth distribution at TD Insurance admits. Major milestones often prompt people to think about life insurance: getting your first job, buying your first home, getting married or having children.
Seventy per cent of Canadian fathers have a life insurance policy and 40% bought or upgraded their policy when they got married; 76% did when they became a parent, a recent RBC Insurance survey reveals. But almost 40% of them have no clue how much the policy is worth or how much they need. Gen Y consumers are the least likely to own life insurance. But four in 10 Gen Y households say they would have immediate trouble meeting everyday living expenses if a primary wage earner were to die, says LIMRA’s 2010 Life Insurance Ownership Across the Generations study. But a third of American respondents say they were likely to buy life insurance in the next year.
Unless you are an immortal vampire, you’re going to die. Do you want to leave anything to your loved ones?
No one wants to think about dying. But let’s just say for example that you suffer a fatal allergic reaction to garlic; who would your sudden passing affect financially? You might want to consider getting coverage to settle your debts (your mortgage for example), pay for your farewell party and maybe leave some money to take care of your loved ones. However, despite what anyone says, you might not even need life insurance. “If you don’t have kids and you don’t have a spouse, then maybe it’s not necessary,” says Sandi Martin, a 34-year-old fee-only financial planner. “If nobody is depending on you for your income and you die, then what do you need to replace?” The money you’d put to monthly insurance premiums might better serve you invested in a tax-free savings account, for example.
Unless you have a crystal ball or a hot tub time machine, you will not know when or if a life event will suddenly make you uninsurable or subject to way higher premiums.
If you don’t feel the need to leave your parents anything, think ahead for a moment. Will you have a spouse and/or kids at some point? If so, are you okay with the risk that you may not be as mega fit as you are now? “If [people] want to buy it in 10 years, they do run the risk of no longer being healthy,” says Alec Blundell, an assistant vice-president at Co-Operators Life Insurance Company. “But I recognize that people in their 20s don’t like thinking about those concepts and do put it off.”
Last year, Rebekah Brinks, a 32-year-old supply teacher in Simcoe, Ont., was diagnosed with ovarian cancer. They caught it early and the mother of two is recovering. However, she laments that she was unable to get the kind of life insurance coverage that she wanted for her family; so she’s going to wait until she’s been cancer-free for five years and apply again. “I was healthy too and there was no [history] of ovarian cancer in my family. It was a bizarre thing that came out of nowhere,” she says. “So for the next five years, if anything happens, that’s a burden that my husband has to deal with.”
The earlier you buy, the cheaper the monthly premiums will be and the longer you’ll be able to lock them in at that price. Term premium rates increase in increments, every 10 years for example. For example, for a healthy, non-smoking 25-year-old, $250,000 worth of life insurance coverage for a term of 25 years would cost $25.65 a month, Mr. Blundell says. For a healthy, non-smoking 35-year-old, the same coverage would be $34.20 a month.
Also, if you think one day that you might consider taking up extreme sports, get life insurance long before you start. (Some insurers will ask if you have any intention of participating in hazardous activity in the next two years.) Your daring hobbies could ratchet up your monthly premiums. “Life insurance is not automatic. You do have to qualify for it. Your qualification and cost are going to depend what type of risk you are,” Mr. Minor says.
Unless your parents are the Kardashians, you might not receive a big inheritance.
Would your parents consider arranging for a life insurance policy, having you pay the premiums and requesting that you be designated as the beneficiary? (Whenever I mention this, my future mother-in-law thinks I’m conspiring to murder her for money.) Be warned, however, the premiums on an older individual are more costly.
“Last week, I settled a case with two brothers and their 60-year-old father,” says Mark Halpern, a certified financial planner and president of illnessPROTECTION.com. “They bought some insurance for the father. It was a small [universal life insurance] policy for $100,000; but the brothers are paying the [$2,000 annual] premium between the two of them…in order to inherit or have money to pay for final expenses.”
Insurance is a good way to get tax-free dollars to beneficiaries, he added. He gave the example of parents who bought a cottage for $100,000 and its value has grown to $500,000.
“On their death, there’s going to be a $400,000 capital gain. There are going to be taxes of $100,000. Unfortunately families either have to come up with that money and it might not be liquid or available from the estate or they have to borrow money. The saddest part is people actually have to sell the asset in order to get the money to pay the taxes. That’s where life insurance is the most cost-effective and flexible tool.”
Unless you are Superman, you’re not bulletproof.
What if you got injured or sick and were unable to work? This is where disability insurance could help. A small percentage of term life policies ever get paid out. However, people have a much bigger chance of becoming injured, which is why disability insurance tends to be pricier.
“You’re still in your 20s or 30s and you’ve had a bad accident. You’re off work and you have no income or limited income but you still have financial obligations because you have to pay your mortgage. It’s a big burden to take on,” Mr. Minor says. “[Insurance] will help offset that burden and let you focus on your rehabilitation or recovery.”
You’re five times more likely to suffer an illness before the age of 65 than you are to die before 65. If you purchase a $100,000 critical illness policy and you get cancer or suffer a stroke, for example, the insurance company will pay you that amount to do with as you wish.