It is understandable that many people shy away from conversations about life insurance and estate planning. They are not comfortable topics. But they are important to discuss.
Having life insurance before you need it can save money on premiums. It can reduce the potential for stress or conflict among family members if someone dies. And you can’t place a value on the peace of mind having life insurance can bring.
The bottom line is, if you have a family, mortgage or other financial obligations, or own a business, it’s essential to talk to an advisor about buying life insurance. You don’t want to burden your family with financial obligations upon your death. They’ll receive a tax-free payment, in most cases.
With so many options, one is right for you
“There are so many different reasons to have it,” says Patrick Fitzgerald, advisor at Lifelong Financial Solutions Inc., Sun Life Financial. “They range from more of an actual need to more of an option. The single biggest need is typically to replace one’s largest asset. In a lot of cases people think it’s their home. Or they might think it’s their retirement savings. But in essence it’s to replace lost income. When you stack up lost income over the course of 10, 20, 25 years, that becomes a huge asset to replace, if something were to happen to one or more breadwinners in the family.”
There is a large number of options, with term life insurance and whole life being the most popular. Costs depend on such factors as health, how many people are on the contract, lifestyle factors such as smoking, and whether the applicant has an occupation that carries an inherent risk, like a pilot.
Term insurance covers you for a specified period of time, paying a set amount to your beneficiaries over that term. You can renew at the end of the term.
Whole life insurance or permanent life insurance usually has higher premiums, since it covers you for your entire life. There are investment components to whole life and variations to it, such as universal life. Whole life builds value over time and has cash-out options.
For example, you can cash out the value of whole life insurance later in life to help supplement your expenses in retirement. You can also borrow against the value of that policy.
Life insurance is not designed to be a top-performing asset, in terms of financial return solely, but if you look at what it does, it can be a complementary part of someone’s financial strategy.
“For many, life insurance can be a key wealth management strategy as it can be used to create, preserve or equalize an estate in the case of death,” says Wilmot George, vice-president of tax, retirement and estate planning at CI Global Asset Management. “The absence of insurance can add stress and complexity to families, often at a time when grieving should be the priority.”
George says that, as a risk management tool, life insurance can ensure that dependents are provided for, especially when families are younger and have significant debts. It can preserve assets that might otherwise be eroded due to outstanding tax liabilities at death, like a home, vacation property or business interests. And it can provide liquidity for an estate – one child receives the family cottage, while others receive cash, for example.
Seek out an advisor to help you understand your options
Talking to an insurance advisor is important for a lot of reasons. Anyone can research life insurance online. But what you don’t want is for there to be something in the fine print that you didn’t know about, which impacts what you assumed would be a tax-free payout upon your death.
For example, look at insurance to address a mortgage obligation upon death. Having mortgage insurance can be a good thing. But what many people may not understand is that, with mortgage insurance, the policy holder will not choose the beneficiary. The bank is and it gets the payout. Plus the payout shrinks as your mortgage decreases. And very importantly, the contract doesn’t go through the approval or underwriting process until the claim is actually processed at the time of death. There has been news coverage of denials of mortgage life insurance claims.
Term insurance might be a better option in that mortgage scenario, says Fitzgerald. The value of the insurance won’t go down as the mortgage decreases. Premiums stay the same, and you can name your beneficiary. That beneficiary then can decide to pay off the mortgage, or pay a portion, and use the rest as income replacement.
So after taking that first step of deciding you need life insurance, what do you do next? There’s a vast sea of options and costs. You will want to sit down with an advisor and have a conversation.
Twelve questions you need to ask an advisor
- Can I get a needs analysis done up, in writing? This might be simplistic – for example, the amount of insurance needs to cover the value of a mortgage. However, often an individual’s situation is more complex – and insurance needs to complement income replacement, estate planning or taxation strategies.
- What type of insurance should I consider? The advisor needs to educate you on the range of products out there.
- How does life insurance integrate with my existing wealth management plan? The advisor will want to link life insurance with your overall financial goals and strategies, and even co-ordinate with your accountant, lawyer and wealth management team.
- What is the service model of your team? This includes commitment to annual reviews of your policy, communication strategy, the team’s designations. Find out more about their process.
- How does the underwriting process work? The advisor will walk you every step and will want to link life insurance with your overall financial goals and strategies, and even co-ordinate with your accountant, lawyer and wealth management team.
- Are there any exclusions or items that I need to be aware of that can change my contract? In other words, you want to reduce the likelihood of surprises for your beneficiaries upon your death.
- How will my insurance grow or evolve with me as my life evolves, and needs change?
- Are there any other riders or add-ons that I should consider with my coverage?
- What are the differences between mortgage insurance/group insurance at my workplace and individually owned insurance? How do they integrate together?
- Should I be considering anything else other than just life insurance? An insurance review should be all-encompassing in terms of needs and look at income replacement for such things as disability, critical illness and long-term care.
- How does life insurance work with my overall financial plan? An advisor will be able to help show how life insurance plays a role as part of the foundation of a financial plan. Helping clients to take care of important items like replacing income, paying off debt, establishing or protecting an estate to name a few.
- Is there any reason why my life insurance would not pay out? An advisor would be able to help clients through all life insurance provisions including any exclusions.
“Get product recommendations based on your goals,” Fitzgerald says. “There is a solution for everyone’s situation.”
Disclaimer: This information and the opinions expressed in this blog are based on research and interviews with the authorities identified, conducted on behalf of Allstate Canada. They have been provided for your convenience only and should not be construed as legal or insurance advice