What is Life Insurance Anyway, and Why You Need Protection TODAY

What is life insurance? It may seem like a simple question, but it’s not as straightforward as one might think. Life insurance provides a financial safety net for those you love. Thinking about the financial details that will cause your family stress BEFORE you pass away is an act of love. Coverage can be used to help avoid serious pitfalls or even bankruptcy.  So why not grab a cup of coffee while I discuss the ins and outs of life insurance and how it can help you create a better future for generations to come?

Life Insurance Is a Contract

First and foremost, you should understand when you apply to a life insurance company for a specific product, and they offer you coverage, you’ve entered into a contract.

1. All of the details of your coverage are outlined in your “Policy,” and when you sign it, the protection is in force. This means the life insurance company has a legal obligation to pay out if you’ve met all the conditions of coverage.
2. In exchange for your “Premiums” (the money the life insurance company receives to keep your coverage in force), the insurer agrees to pay a death benefit should you die before the coverage expires. Premiums, more times than not, are paid monthly, but you can also opt to pay them bi-annually, yearly, or in a lump sum to save some cash (often, you’ll be given a discount for paying upfront)
3. A “Death Benefit” or “Face Value” is the agreed-upon amount of money the life insurance provides your beneficiary. Death benefits typically are offered in the following increments: $100k, $250k, $500k, and $1 million.
4. The “Beneficiary” is the person, people, or charity you select to receive the death benefit.
5. If you select “Term Insurance,” coverage is provided for a finite period or a “Term.” Terms are typically purchased in the following increments: 10 years, 20 years, 30 years, or 40 years.
6. Term Insurance typically requires a medical exam, but other options, like simplified and guaranteed issue, allow you to skip the needles and urine collection.
7. If you select “Permanent Insurance,” you are covered until your death as long as you pay your premiums.
8. Permanent insurance typically has a “Cash Value” component, which means cash builds up in your policy that can be borrowed against in your lifetime. Permanent insurance comes in many packages that include investment options. If you want permanent solutions, you should speak to an independent agent. It’s more expensive and complicated than term insurance.

“Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder.” Guide to Life Insurance, Investopedia

Why You Need Life Insurance

Now that we have that out of the way, assessing WHY you need life insurance is essential. An excellent place to start is by asking yourself: If I’m not here tomorrow, are there people depending on me who will be in severe financial distress? If the answer is “yes,” you need life insurance. Life insurance coverage is a no-brainer if you have a mortgage, debt, and dependents. What would happen if your income disappeared permanently? Remember, when you die, your income dies with you. Maybe you live in a dual-income home and aren’t too worried—but when you do the math, you’ll see that a loss has far-reaching repercussions even if your income is not primary. Getting real is even more critical if your loved ones depend on a single income.  Life insurance is a versatile product and can be used for much more than income replacement. Let’s look at some creative ways coverage can be used now!

Creative Ways to Use Life Insurance

1. Income Replacement:

   This is the reason most people buy life insurance. Typically, term fulfills this need.

2. Final Expenses:

   When you die, your financial obligations do NOT expire. Final expense insurance provides the funds for your loved ones to pay for the funeral and any outlying debt that has to be satisfied. These are typically permanent plans with smaller face values. I love this product because it’s affordable and straightforward to apply for.

3. Business Purposes:

   This is a lot more complicated. Life insurance can be used for many reasons, including protecting partners from the death of key personnel, protecting employees, and even recruiting high-caliber employees. Term and Permanent products can be used depending on need.

4. Charitable Giving:

   Did you know you can leave your life insurance policy to a qualified charitable institution? Another perk? It’s a tax write-off for your estate. These are permanent policies.

5. To Make Sure the Family Cottage Carries On:

   Taxes on properties that aren’t primary residences hit hard. So, to defray this obligation, people often purchase a policy to cover those bills. This would be a permanent policy.

6. As a Tax Shelter:

   If you have enough cash and have exhausted all traditional means, this is an excellent place to put your money. These are permanent policies.

7. To Leave Money for a Child with Special Needs:

   : As you know, financial obligations for children with special needs continue after your death. You can create a trust funded by a life insurance policy. These instruments are set up with permanent policies.

How Much Life Insurance Do You Need?

The first step I ask my clients to perform is a needs analysis. This provides the information they need to decide how much coverage they can afford. To give you an idea, we recommend a minimum of 7 – 10 times your gross monthly income. If you have young children, it should probably be closer to 15 times. It may sound like a lot, but remember, these funds are needed for most years. You also have to factor in wage increases, cost of living increases, and your goals.

How Long Do You Need Life Insurance?

Another significant issue is timing. How long do you need coverage? This question isn’t as straightforward as you might think. Most families seek a safety net for their most vulnerable years (term insurance). For others, they want to leave a nest egg to their family (permanent insurance). Remember, life insurance is most affordable when you are young and healthy. So, if you opt for a shorter term and find you still need coverage, this could work to your detriment. I have clients who thought they’d be out of debt in 20 years, only to find that’s untrue. Now they are applying for more coverage – but they are two decades older with more health issues. One of the most important parts of insurance planning is thinking ahead because life doesn’t always unfold as we predict.

These Decisions Are More Important Than You Know!

You can take two paths when you purchase a life insurance policy. The first is contacting an insurer or financial institution directly. Maybe you heard that RBC is a terrific company, so you give them a ring to buy a policy. …STOP.  If you call a tied agent or bank representative, you only get information about the company you contact. Tied agents can only sell their employer’s products.  Hey, what’s the harm if it’s a great insurance company? They are all pretty much the same, right? WRONG!  Different insurers offer different products and specialize in specific niches. For example, some insurers are more lenient for Type 2 diabetes than others. Chances are you don’t know which ones. That’s where an independent agent comes in. We have access to Canada’s best life insurance companies and provide you with all the necessary information to save time and cash. 

Keys to Finding the BEST & Most Affordable Coverage

The keys to getting the best possible policy are:

1. Using an independent agent that helps you select the RIGHT carrier for your specific needs
2. Selecting the correct type of coverage. Term works for most people most of the time, but there is a time and place for permanent plans. For example, I like final expense products, and they are affordable, but a larger whole-life policy works only for those with expendable income.
3. Knowing your goals and picking the correct term and face value is critical. Many people cheap out on life insurance. You don’t want to be caught without coverage when you need it most, and being underinsured is also a recipe for disaster.

Picking out a knowledgeable and independent life insurance agent, like those at Policy Architects, and doing your homework can save you thousands over your term. 

What is Life Insurance Anyway? What Happens When You Die

An article answering what is life insurance would not be complete without discussing what happens when you die. Many people are concerned that life insurance companies don’t pay out. Well, I am here to tell you that’s not the case. Life insurance is highly regulated in Canada, and insurers know they will be held accountable if they pull any funny business. That’s not to say that claims always go off without a hitch. 

Fraud & Leaving Out Information Complicates Claims

Lying on your life insurance application will NOT help your family. Some people believe they can hide medical issues to get a better rating. Nope. Insurance companies are good at sniffing out this behavior, and if they find out you lied on your application, your family likely won’t see any money.  Another issue that can result in an investigation that holds up your claim or results in denial is leaving out important information. Let’s say you forget to tell your agent about your occasional smoking habit. If your life insurance company gets wind of this, they may deny the claim even if smoking didn’t contribute to your death.  The moral of the story? Be candid about everything – even the most minor and seemingly insignificant details…and whatever you do, don’t lie. It’s fraud.

Beware of the 2-Year Contestability Period

& 2-Year Waiting Period Connected to Guaranteed Issue Insurance

Did you know that if you pass away within two years of buying a life insurance policy, the insurance company has the right to investigate the claim? This is to protect them from fraudulent applications. They want to ensure you don’t misrepresent your health or lifestyle to obtain coverage. In cases of suicide during this period, claims will automatically be denied.  After 24 months, it’s almost impossible for a life insurance company to contest a payout unless your policy states the contrary or they can prove you did something fraudulent.

“Please note: A CBC News investigation has found that leading insurers such as Manulife, Desjardins, SunLife and Great-West Life, among others, can deny coverage for costs associated with attempted suicide or intentionally self-inflicted injuries.” Suicide attempts and insurance: Why you might not be covered, CBC 

Administrative Delays

Some companies are much better than others regarding customer service and administration. This is another reason to do your homework. While it’s rare that a claim is denied or contested unless it falls within the 24 months discussed above, delays do occur. When you are in mourning, and your creditors are knocking at the door, the last thing you want is to wait months to receive a check. For the most part, once the proper documents are submitted, beneficiaries receive their checks one to two weeks after they file their claim.

The Importance of Selecting the Right Beneficiary & Keeping the Info Up to Date

Take care when you select your beneficiary.  First and foremost, do NOT choose a minor without designating a Trustee. This leaves your child in limbo, and they may not have access to the claim’s proceeds until they turn 18, resulting in administrative issues. Unless your life insurance is part of a divorce or legal agreement, always select your beneficiaries as “revocable.” This will allow you to make necessary changes by filling out and signing a simple change of beneficiary form. If you tick the ” irrevocable ” box, your beneficiary must sign off on any changes. This may not seem important, but I’ve heard horror stories firsthand of clients trying to track down a beneficiary halfway around the world to execute a change of beneficiary on their life insurance. You should also regularly review your beneficiaries. People die, and circumstances change. For example, ex-wives and husbands have erroneously received death benefits because someone forgot to keep their records up to date. True story.

What is Life Insurance Anyway? It’s LOVE

What is life insurance anyway? Well, in my opinion, it’s love. Providing your family with a safety net is an act of responsibility and care for circumstances you aren’t there to fix. Life seems like it will go on forever, but we are all very mortal. That dawned on me when I had my son. I am the primary breadwinner, so I have coverage to ensure that if something happens to me, my family can stay in the house and continue to live the life we’ve made together. If you are interested in finding out more about life insurance coverage, give me a call today. My advice is free, and I enjoy helping clients make this important decision.