Life insurance is a must if you have a spouse or children who depend on your income to get by. But asking a life insurance agent if you need more life insurance is like asking a barber if you need a haircut. Indeed, the life insurance business has a long history of commission-hungry agents pushing expensive policies onto consumers who would be better off with simple term coverage.
While you should view any life insurance discussion with a dose of skepticism, the reality is that many people are severely underinsured. Most group insurance policies at your workplace only provide coverage for one or two times your annual salary. You might need 10 or 15 times that amount if you have a young family at home.
Life insurance comes in two flavours, term and permanent, and both are designed to help provide your loved ones with financial security in case you die.
A term life insurance policy provides protection for a specific number of years — typically in 10-or 20-year terms — in exchange for a regular fixed payment. If the policyholder dies within the period of coverage, the death benefit gets paid out to the beneficiary. You can renew the policy when the term expires but your premiums will increase based on your age, gender, and health.
A permanent life insurance policy remains in place until death. Your premiums generally stay the same for the duration of the policy. Permanent insurance combines term life with an investment component. A portion of your premiums goes toward the insurance coverage while the rest goes into the investment plan.
Term insurance is likely the better choice for most people due to its flexibility and affordability. A 40-year-old male non-smoker can expect to pay between $45 and $50 per month for a 20-year term life policy with $500,000 in coverage.
A permanent policy with the same $500,000 death benefit could cost between $200 and $250 per month.
I found myself in the market for a life insurance policy recently after deciding to leave my employer of 10 years to strike out on my own as a freelancer. I had group life insurance coverage through my employer for 2.5 times my salary. I had also topped up that amount by an additional $500,000 for total coverage of $700,000.
The rational side of me knew I’d eventually leave my job and would need to take out a private life insurance policy. But I didn’t get around to it. Then I quit my job. So, for the past few weeks, I’ve scrambled to get an insurance policy in place before the end of the year to avoid any lapse in coverage.
First, I performed a life insurance needs analysis. A lot has changed in 10 years. My kids are older (11 and 8 next year). We have a lot more money saved. We have less debt. Do we still need $700,000 in coverage? Do we need more?
A needs analysis considers variables such as your survivor’s income and spending needs, years of income replacement, personal and household debt, children’s education, nonregistered assets, and final expenses. My analysis found that a 15-year term with $600,000 in coverage would be sufficient.
I shopped around for term life insurance quotes using the website term4sale.ca. This site provides unbiased comparisons from various life insurance providers, and quotes are easily obtained within seconds (without entering an email address or phone number, so there’s no risk of being hunted down by commission-hungry agents).
Armed with a range of quotes from various insurers, I called my long-time auto and home insurance broker to see what he could do for me. He asked about the quotes, so I shared where I found them. He said his quotes might vary somewhat because the insurer will do a more rigorous interview and examination, which makes sense. After all, I filled out a quick five question form online to arrive at those other quotes.
We settled on one insurer which offered the 15-year, $600,000 term life policy at a price that seemed reasonable (less than $45 per month). They set up a 20-minute phone interview, and then arranged to have a nurse visit my home to take blood and urine samples, and to take my blood pressure. Definitely more thorough than an online quote!
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I kicked myself for not taking out a private life insurance policy years ago. But now I feel peace of mind entering the new year as a full-time freelancer with my own life insurance policy in place.
The lesson I learned is that insurance is cheap and plentiful when you’re young and healthy, so you might as well buy as much term insurance as you need through a private policy — just in case. After all, isn’t that what insurance is for?