TORONTO – Death isn’t a topic people like talking about, but keeping mum and failing to prepare financially for the inevitable can have a lasting impact on loved ones.
So where to begin when digging through the array of life insurance options out there?
“It’s not sexy, but financially, (buying life insurance) might be the wisest decision you’ll ever make,” said Mark Coutts, a certified financial planner at Sun Life Financial.
“Insurance is always something, in hindsight, that seems like a great idea.”
Generally, there are two main types of life insurance — term life policies and whole life policies.
Term life insurance is the more popular option because it allows policyholders to buy it for a specific time period — for example, 10 to 25 years. They’re guaranteed to have coverage for that period at a set monthly premium. After the term is over, holders can sign on for a new term (if they are still in good health) but at a new, usually higher rate.
A whole life policy can also be purchased for a set period at a set price. But once payments are completed for that time period, the policyholder will stay covered for the rest of their life, however long that may be.
With a whole life policy — unlike term insurance — premiums that are paid will be invested by the insurance company. With some whole life policies, consumers also have the option to choose what investment vehicles they want their premiums to go into, including accounts where they can be paid a dividend annually.
A whole life policy is also attractive because once all payments are made, it cannot be reneged even if one’s health worsens.
So why choose a term policy over a whole life policy? The big difference between the two policies is price.
For example, a premium on a term policy can be about $100 a month, while a whole life policy can run up to $500 a month, for the same amount of coverage.
Coutts likened the two types of policies to renting versus buying a home.
Term policies are more attractive because they’re cheaper over the short term but policyholders are not building up any equity once the term ends.
A whole life policy, like a mortgage, is more expensive upfront, but people can maintain coverage and there is more opportunity to take that money and use it for estate, tax and investment planning. It also can be used as a tax shelter later in life.
But at the end of the day, what kind of insurance consumers buy depends on three fundamental questions:
How much insurance do they need? How long do they need it for? And what is their budget?
Coutts said people should consider all the costs associated with their death.
If they are the main breadwinner in their family and they have dependents, they should calculate how much money their survivors will need when they die. Funeral costs, mortgage payments, car loans and inheritances should also be taken into account.
It’s often recommended that people purchase a life insurance policy between five to seven times their annual salary.
“What you don’t want to happen is for the insurance to expire before your need does, and for your health to change in the interim,” said Coutts. “Then we’ve got a problem.”
Ron Sanderson with the Canadian Life and Health Insurance Association said it’s also important to consider whether there is additional coverage through work or a professional association, and factor that in before buying a personal policy.
He noted that term policies are also not forever. Once a young couple ages, they can often convert their term policy into a permanent one if they’ve taken care of most of their financial responsibilities, including maxing out their RRSPs and paying down their debt.
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