Last updated on February 4th, 2020
Discussing your life insurance needs may seem rather uncomfortable as nobody likes to think what happens, when it’s time to go. Yet, life insurance is an important part of your overall financial plan and is a crucial step to protect your loved ones.
It doesn’t mean that every single person needs life insurance. If such an unfortunate event as your death is not going to affect anyone financially, then you probably don’t need to have a life insurance policy. On the other hand, if have a family, who relies on you as a financial provider, you may want to think forward and consult with an Insurance Advisor to find out which policies will be the best fit for you and your loved ones.
To help select the right plan you need to consider what your possible financial liabilities, your assets, and how much income you want to replace for your family with a life insurance policy. It’s important to understand the purpose of such insurance as well as keep track of how your financial situation changes over the years.
Through the course of time, your priorities may change and you might consider switching to a different type of life insurance or completely cancelling it, if it’s served its purpose. You should also know that you can use a Life Insurance plan as an estate planning tool to cover income taxes at the moment of death, leaving a heritage for your beneficiaries or even making a charitable contribution, if so desire.
Let’s say, for a young couple, who depend on each other’s income and planning on to start a family along with getting a mortgage, financial security will be a utmost goal and, therefore, a Term Life Insurance policy is a must in such case.
Life insurance: How much coverage is enough?
To get a quick estimate for a Life Insurance policy, you can apply a rule of thumb, which is 10 to 15 times your annual salary. Once you come to see an insurance Advisor, you can use a Life Insurance Calculator to get a better idea of what the cost for your insurance needs might be.
It will take into account any debts you have, your net worth, estimated rate of inflation and your return rate, if you have your savings invested. Once you know the amount of finances you need to replace for your family in case of your death, it’s a good idea to get a better understanding of different types of life insurance policies.
Life insurance: What are the types?
| Term insurance | Permanent insurance | Universal life insurance | |
| Summary | Provides temporary low cost protection for certain events in your life (mortgage, little kids). | Stable lifelong protection. Over time offers a better solution than renewing a term plan. | Offers long term life solution with opportunities for tax deferred growth of investments. |
| Duration | Coverage will end at a certain age | Guaranteed lifetime protection | Typically lifetime protection |
| Cost | Lowest cost initially, increase when you renew, significant increase when you get older | Premiums tend to be higher than term insurance when you’re younger but will be lower than term when you’re older. | |
| Cash value | None | A cash value usually accumulates, and is paid to you upon cancellation. | Part of your premiums can be invested and grow tax-deferred. |
Life Insurance: What to choose?
Most people tend to prefer Term Insurance policies for various time periods such as 10 year, 20 year or 30 year, etc. It is true that it can be sufficiently cost-effective to achieve the main goal of any Life Insurance – income protection.
Despite that, permanent insurance policies do offer some advantages. You should regularly review your life insurance as your personal circumstances change such as marriage, birth of children, purchasing of major assets including a house, are key points when you will want to be sure to review how your life insurance fits within your financial plan.
Keep track of your goals to see whether you need to upgrade or downgrade your insurance plan.
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