3 Best Questions About Life Insurance
I recently heard from an acquaintance who had questions about life insurance as part of their financial plan. Below are my 3 best questions about life insurance to ask when deciding: How Much, What Kind, and What Company.1. How much? This insurance needs calculator is produced by Manulife and steers you toward their products at the end, but is a comprehensive calculator that will tell you how much life insurance is appropriate based on your situation. You didn't mention disability or critical illness as a concern, but you might like to have a look at Manulife's Risk Calculator to have a look at your risks for other events.
2. What kind? Term or something permanent? Term is like renting: you have a price set for a number of years but can usually renew at the end of that term. If you renew, the cost jumps. Using my age, a $500,000 term 20 life plan with BMO would cost $36.45 a month for the next 20 years, but would jump to $417.15 a month for the 20 years after that. Most people's insurance needs decrease as they get older (less mortgage, more savings, fewer possible missed years of work), so some term is good for those temporary needs. You could get a term that stretches all the way to 65 and covers your working years.
The thing to remember about term is that the lower the premium, the less likely the insurance company will have to pay out. A term 10 policy for a young person is very affordable because their risk of mortality is quite low. Term 20 is slightly more because the risk is slightly higher. Term to 65 is somewhat higher, but again most people live past 65 these days.
That's one reason why permanent insurance looks much more expensive: eventually, the insurance company will have to pay out if you keep paying the premiums. The cost to you is often locked in so there are no increases. This will be more than your current monthly cost for a term policy but less than if you keep renewing that term policy up until your current life expectancy. Some policies can build up a cash value inside the policy, but they don't have to. Think of those policies like an investment vehicle in addition to RRSP and TFSA options. You'll pay more for these because you're funding your insurance risk and a savings component. Some term plans offer convertibility to permanent plans down the road instead of renewal premiums.
3. What company? Working with a group plan can be tricky. While the expectation is that we get a deal, it's not always the case. In my experience with clients, it's often less expensive going with an insurer independent of a group plan. This is particularly true when we're looking at a group plan that is guaranteed issue or only asks a few basic medical questions. If you're generally healthy, then you'll end up essentially subsidizing the riskier people in the group plan. If you're generally healthy, going through the more rigorous underwriting process can mean that you end up paying much less. I'd compare the costs between the group plan & an independent one.
There are tons of companies out there, so to find the best match, I'd recommend working with an insurance professional. Look for someone with their Certified Financial Planner designation (CFP) or perhaps with their Chartered Life Underwriter (CLU) designation. These show that they have a certain level of professionalism and knowledge.
There you have it: my three first questions to answer when considering life insurance. Drop me a line if you'd like to see how they apply to your situation.