The Top 10 Reasons to Buy Life Insurance
The number-one question many brokers get when trying to convince a client to buy life insurance is probably, “Why do I need it?” After all, it’s an invisible product and on its face, it seems like you’re paying for something that you’re not going to see the benefit of anyway. Well, that’s not exactly true. Life insurance can benefit you while you’re alive just as much as it can benefit your family when you die.
Don’t believe us? Below are the “Top 10 Reasons You Should Buy Life Insurance” if you need a little extra convincing.
1. To cover a mortgage: If your main reason for buying insurance is to cover a mortgage, make sure you buy a regular individual term insurance policy because if you buy a mortgage insurance from a bank, when you apply for your mortgage, you will be paying premiums, but you may not necessarily be covered. As this article in the Toronto Star outlines, banks engage in post-claim underwriting, which means they assess your health at the time of claim and you may be disqualified from coverage even though you’ve been paying the premiums until then.
If your health is not an issue, there are still reasons to stay away from mortgage insurance from a bank. One reason is that the longer you carry a mortgage insurance policy, the more the actual amount of coverage you have goes down because it only pays the amount left owing on your mortgage when you die. You also have to renew your policy every time you renew your mortgage.
“What I tell people is that it’s not guaranteed and your premium is probably going to go up because you’re five years older, and you could have heart problems or diabetes,” Andre L’Ecuyer, a mortgage broker with Mortgage Agent in Petawawa, told the Toronto Star. “Then, on the opposite side, what happens with your mortgage is that it decreases as the years go by. What’s wrong with this picture? You’re paying more for something that’s not guaranteed, paying a higher premium and you’re getting less.”
Mortgage insurance is not portable but the term insurance used to pay your mortgage is. Term insurance goes with you and this makes it a much more compelling option than the more underhanded mortgage insurance.
If you already have term insurance, you can consider boosting the amount of coverage to include your mortgage.
2. To Replace Lost Income: Chantal Marr, president of LSM Insurance, says the number-one reason to purchase life insurance is to replace lost income. If your dependents are counting on your income and you die, that income stops. How would things like your mortgage and the groceries get paid for? “People often forgot life insurance is not for you. It’s for the people you care about. It’s the most unselfish decision someone can make,” says Marr.
3. To Make Sure there is Money to Cover Your Child’s Education: College tuition in Canada has become ridiculously expensive, rising three times the rate of inflation at 6.2% and forcing many students into debt, according to a recent report from The Globe and Mail. If a parent dies prematurely, a life insurance policy can sav for an education preserved and make sure tuition payments aren’t interrupted by a sudden death. If you have a permanent policy, you can use the cash value portion of the policy to reinvest a portion of the premiums you pay into your children’s education.
The advantage to using your savings from a life insurance policy is that no taxes are applicable to these loans as long as you make your premium payments. Furthermore, the interest you earn from your life insurance policy’s investments is non-taxable as income. Therefore, your money grows tax-deferred and can be used tax-free. Learn more at insuranceindepth.com.
4. To Fund a Buy Sell Agreement: No properly structured business should move forward without a proper buy/sell agreement. A buy/sell agreement sets out the rights and obligations between the shareholders or owners and the business. It even sets out what happens to the business should one of the principal owners die. A life insurance policy on all the principal owners can fund such an agreement and make sure your business continues.
MSN Money named funding a buy-sell agreement one of its five reasons “singles need life insurance” writing: “If you’re a small business owner with partners, a life insurance policy can allow your partners to more seamlessly purchase your portion of the business. Partners in the company would enter into a buy-sell agreement, buying policies (either as individuals or as a company) on the lives of the co-owners with the understanding that the payout would go to the deceased partner’s heirs without giving them a stake in the company itself.”
5. To Cover Final Expenses: Life insurance is a great way to make sure your funeral expenses are covered and that any debts outstanding on your estate are taken care of, like taxes. ”If you die at a ripe old age, you’re not likely to have dependents who are still relying on your income. But that doesn’t mean your family won’t face big expenses when you pass on and your estate is divided up. If you own property, for example, you can’t pass it to your children tax-free: your estate will be on the hook for capital gains taxes, whether or not your heirs sell the real estate,” writes Money Sense Magazine. ”If your partner is already gone, the final tax bill on your investments can also be enormous. When the second spouse dies, RRSP and RRIF investments are fully taxable in the year of death. Depending on your province, that means 39% to 46% of your nest egg will go to the government instead of your children, grandchildren or charity.”
The magazine recommends considering a permanent insurance policy with a death benefit that can partially or completely offset your final expenses. The premiums can be very high if you don’t get the coverage until late in life, but the payout is guaranteed. “If you know you won’t need the cash while you’re alive, it may be the best way to keep your wealth in the family,” says the article.
6. To Lock in a Low Rate While You’re in Good Health: The best time to buy life insurance is when you’re young and healthy because premiums are at their cheapest. Some policies allow you to lock in the policy at this inexpensive rate, and that’s what an article in The Globe and Mail recommends.
“Frankly, for a young person to buy term insurance is a very minimal expense, less than what their phone bill is every month, that’s for sure,” Harley Lockhart, the chairman of Advocis, the Financial Advisors Association of Canada, told The Globe and Mail.
That price is reported to be $150 per year. Despite the cheap price, though, it’s still recommended you take care of the financial burdens in your present as a student first, before looking into life insurance.
“If you’ve got debts, student loans, you haven’t maxed out an RRSP and you’re very young, the advice is often to look at those things first and make sure those things are covered off, before looking into life insurance to cover off the future,” Janine White, vice-president of Kanetix.ca, told the reporter.
7. As a Means of Leaving Money for Your Favourite Charity… For those who want to give back, life insurance can be the perfect option. You can designate your favourite charity as the beneficiary of a new or existing life insurance policy or you can get a life insurance policy that is the equivalent value of your RRSP or RRIF and designate a charity as the beneficiary of your RRSP or RRIF.
Some insurance companies offer Wealth Replacement Insurance, which allows you to donate a large asset or lump sum of money to charity. In return, you receive a charitable credit for the donation, which results in tax savings for the year the donation is made. You can then invest these tax savings in an insurance policy that potentially results in enough proceeds to replace the value of the gifted property.
8. For Estate Planning: The Toronto Star laid out how life insurance can aid in your estate planning in their article discussing the “10 Things You Need Know About Life Insurance”: “life insurance is often used to meet longer-term estate planning needs, such as covering capital gains taxes due at death or providing a guaranteed pool of money for a beneficiary.”
9. To Take Advantage of its Tax-Sheltering Features: In his article for The Globe and Mail detailing how to make life insurance work for you, Tim Cestnick puts life insurance’s tax-sheltering abilities at the top. He writes, “Assets inside an insurance policy can accumulate free of annual income tax, and this sheltering can allow for greater accumulation over time than when using comparable vehicles. If you’re accumulating part of your investment portfolio inside an insurance policy, holding all or some of your fixed-income investments in the policy will allow you to shelter what might otherwise be highly taxed interest income.”
10. To Help Care for a Disabled Child: When you buy life insurance, you can name anyone the beneficiary, including a disabled child. If that child is unable to manage their own finances, a Henson Trust can be set up. The Henson Trust is a type of trust that “is set up for disabled persons (children or adults) because they (the assets inside) are not able to be managed by the beneficiary or be managed directly by the beneficiary.” While many people with disabilities are able to handle their finances on their own, some may lack that capacity.
The Henson Trust also means that because the assets in the trust are not managed by the beneficiary, they are not technically owned by the beneficiary either. This is one of the key reasons why people set up Henson Trusts — because they allow the beneficiary to still be provided for while receiving government benefits. In Canada, depending on the severity of the disability, disabled persons qualify for government assistance and subsidies. These can take the form of physiotherapy or extended health coverage, home care, or placement in an extended living facility. If the parent were to pass on without having a Henson Trust in place, or a Henson Fund formed through their will, depending on how large their estate was, their child’s benefits may be revoked.