July 12th, 2016
There are dozens of reasons why someone would need life insurance protection. Most of the events that would trigger a life insurance need are life changing events that have a major impact on one's finances. Check out the reasons why you need coverage if you experience one of these life changing events.
Once two people get married, or are considered common-law, they automatically assume certain financial rights and obligations towards one another that otherwise would not apply. If one spouse is dependent on the other's income, the dependent spouse could face financial hardships if the bread-winning spouse were to suddenly die.
The loss of income alone could prove devastating to the surviving members of the family once emergency funds are depleted. It's not realistic to depend on help from extended family or government sources alone to be able to survive in most urban Canadian environments. Having adequate life insurance coverage would be necessary for the surviving spouse to maintain their standard of life.
Buying a Home
A new home is likely the largest single purchase anyone will make in their life. With the vast majority of home purchases, the buyer must borrow money from a lender in the form of a mortgage. If the person paying down the mortgage were to pass away, the other inhabitants of the home would have to find a way to continue making mortgage payments. Insuring your mortgage with individual life insurance is a good idea to cover that potential risk.
It's worth mentioning that when a home buyer applies for a new mortgage, the lender will usually offer mortgage insurance. These plans are riddled with negative features for the consumer. Things like post-claim underwriting, higher premiums and decreasing face amounts make these policies considerably less valuable than traditional individual term life insurance.
Having a Baby
Children are dependents and rely on their parents for food, shelter and future expenses like costs of post-secondary education. When planning for the worst case such as the death of a bread-winning parent, you need to factor in all the potential risks the child would face. The surviving parent or guardian should be financially equipped with enough money to last until the youngest child is at least 18.
When a new baby comes into the picture, coverage amount should typically be increased to cover this new liability. Use a child care calculator to get an idea of how much money you would need to replace should your death occur.
Whenever you are switching jobs, you may lose access to group life insurance policies that you may need to rely on. Confirm with the plan administrator at your company to see whether or not you have the option to continue your life insurance policy once you leave.
Also check with your new employer sooner than later to see what level of life insurance coverage your new benefits will provide. If the new employer does not offer life insurance or the face amount limits are too low, it's a good idea to take a look at individual life insurance plans to cover your needs.
Starting a New Business
When an entrepreneur starts a new venture it can be easy to overlook insurance needs. Business and Liability insurance is usually the first thing they will think of, without considering the potential need for life insurance should they pass away. Two risks that new businesses will face can be relieved in part by the concepts of key-man insurance and by funding buy-sell agreements with life insurance.
Key-man insurance will provide a payout to the company should a key person were to pass away. If it can be determined that the company has an insurable interest in the life of the key person, a life insurance policy can be taken out on their life. The company would be listed as the beneficiary. The death benefit would be used to replace the deceased employee and cover any additional switching costs such as training the new employee.
Buy-sell agreements are put in place when a partner in a company passes away and their shares and/or decision-making power within the company are inherited by a loved one. The family member, now a new partner in the company, may not be a good fit for the business so a buy-sell agreement forces the sale of the share back to the company. These buy-sell agreements are often funded by life insurance policies purchased by the company. The cost of the shares are usually based on a formula such as current market value times a multiple.
Term insurance policy coming up for renewal
If you own term life insurance, rates are only guaranteed to stay level for a specific term after which the rates change, usually increasing drastically. One thing insurance companies won't tell you is that they build a buffer into the pricing when renewing a term life insurance policy. They assume the insured is in poor health at the time of renewal and add this higher cost of insurance into the the renewal premium. If the insured is in good health, he or she should likely reapply for a new plan.
It important to never cancel an existing policy until the new plan is approved and in force first. If the new policy application is declined or rated it may be a better idea to pay the renewal rates with the existing policy. Thus, it's advisable to reapply for new term life insurance at least 6 months prior to the existing policy renewal date.
Other than switching to a new job, retiring may be another way you could lose access to group life insurance benefits. Some group policies will allow the plan certificate holder to convert their group life coverage into an individual permanent plan, however these plans can be very expensive as insurance carriers will build a buffer into the renewal rates of these individual permanent insurance options.
The costs are these conversion options are usually much higher than the premium cost of comparable permanent plans available in the market. It's always best to shop the market
for the best available coverage at the lowest rates possible by speaking with a licensed life insurance broker.