Why do we need life insurance?
This may not be the first thing on most people’s minds. We’re almost certain that no one wakes up in the morning and says, “I’m going to have to get life insurance today!” – but that doesn’t mean that you should disregard it. Life insurance plays a significant role in risk management, you can think of it as a gift to your loved ones in the event of your passing. It can assist in the payment of the funeral costs as well as any unpaid debts or tax bills.
Before we go any further, let’s go over some of the basic terms we’ll encounter in a life insurance policy.
Policy is the contract between you and the insurance provider, and as you are likely the one who owns the insurance policy, this would make you the policyholder.
Premiums are the payments you make to the insurance provider on a regular basis to keep your policy active. Premiums are usually paid monthly, or annually.
Beneficiary is the person who will receive your death benefit. It doesn’t have to be just one person; you may split the payout among different people. Actually, it doesn’t even have to be a person for that matter. It may be a charity, a company or even a trusted fund for your cats and dogs!
One of the most critical financial choices you’ll ever make is purchasing life insurance. It not only protects the loved ones you’ll leave behind, but it may also be useful long before that. Although there are several factors to weigh when choosing life insurance, here are ten of the most important steps to consider:
1. Understand The Basic Policies
Term and permanent life are two types of life insurance policies available. It’s critical to understand how they vary before deciding which is best for you. Term-life insurance covers you for a certain period of time; it could either be ten, twenty or thirty years. If you don’t have life insurance yet, term can be a good place to start. Your beneficiary gets the death benefits if you pass away during that time. If you outlive the policy’s term, it merely expires, and you must either renew it or go without coverage. Permanent-life insurance (or whole-life insurance), as the name suggests, is intended to cover you through your entire life. Premiums are higher, but they are often split between a death benefit and an investment component (also known as “Cash Value”). This policy type provides you with protection whilst also helping grow your savings.
2. Examine Your Current Financial Situation
Once you’ve decided on the type of life insurance you want, you’ll need to figure out how much your family will need to maintain their standard of living in the event of your death.
The amount of insurance you may need is determined by a variety of factors, such as standard of living, outstanding debts and inheritance, and the need to replace your income in your absence. Completing a financial needs analysis, which assesses your current financial situation, assets and debts, personal situation, personal goals, and family needs, can be beneficial. A financial needs analysis or financial planner can help to ensure that you are receiving acceptable financial products that you can afford, that are not overly risky, and that will help you finance your long-term goals, such as saving enough money for retirement.
Most insurance agents and financial advisors provide models and examples of this, and there are many tools available online, such as Mint by Intuit.
3. Outline Your Life Insurance Goals
You are projecting far into the future, whether you choose permanent or term-life insurance. Consider where you want to be in 20-30 years and what will matter to you then. Would you rather pay lower term-life premiums and
invest your money elsewhere, such as a college fund or RRSP, or perhaps it’s the investment component of a permanent-life policy that best suits your plans.
4. Determine Your Coverage Needs
When purchasing any life insurance, it is critical to understand how much, and what type, you need. If you decide to purchase insurance through an agent, make a list of what you’ll need ahead of time to avoid being stuck with insufficient coverage or overpaying for coverage you don’t need.
What amount of money will your family need to ensure their well-being and financial security? You can use online calculators to help you decide, but keep in mind that you’re looking at a long period of time. Mortgage payments, college funds, and other long-term costs may not have been factored in yet, and your income is likely to fluctuate over time.
5. Understand the Factors that Affects your Life Insurance Premium
It can be difficult to understand why you were refused a life insurance policy. The reasoning behind your denial may be due to a variety of reasons that can be addressed, so don’t give up! There are several life insurance companies to choose from, and they may all offer you different solutions and prices. Here are some of the things that may affect your life insurance rate:
Physical health – All life insurance companies consider your physical health. High cholesterol, obesity, diabetes, and other chronic diseases, or health issues will affect your premiums, as life insurance companies would regard you as a higher risk if you have a serious health condition. You may be denied coverage depending on the seriousness of the health problem and the life insurance company.
Lifestyle history – When you apply for life insurance, you will often be asked questions about your lifestyle. You may be denied coverage outright, have an exclusion for certain activities, or be quoted higher premiums if you engage in dangerous hobbies or lead an unhealthy lifestyle. Skydiving, rock climbing, and racing cars are just a few examples of what are considered to be dangerous hobbies. Smokers will always be charged higher premiums on their life insurance plans.
Age – In general, it becomes more expensive to obtain life insurance coverage as you get older (which is why buying early is so important). Life insurance companies will often regard you as a higher risk as you age.
Occupation – Most of us devote a significant portion of our lives to our careers. As some jobs are riskier than others, it’s natural for your occupation to have an impact on your life insurance rates. If you work in a dangerous field, getting approval for life insurance might be more difficult or more expensive. Some professions that might affect rates include (but are not limited to): pilots, miners, loggers, truck drivers, farmers, law enforcement personnel, construction labourers, and roofers.
Financial reasons – Your personal finances can have a significant impact on whether or not you are eligible for life insurance. Many insurers will check your credit report to see if you’ve ever filed for bankruptcy or have any outstanding debt. In addition, an insurer will consider your income when determining whether or not you can afford coverage.
Criminal records – You may be denied life insurance coverage by certain if you have a criminal record as insurers may consider you more likely to engage in a high-risk lifestyle. However, each life insurance company will assess your criminal history on an individual basis. Before they offer coverage, the conditions and seriousness of the crime will be taken into account. If you are currently facing felony charges, you will not be able to obtain coverage until the charges are either tried in court or dismissed. Also, if you are currently incarcerated or on probation, you are ineligible to apply for life insurance.
Driving records – You are a higher risk for the insurance company if you have a poor driving record as reckless driving habits are linked to a higher risk of death, according to MADD’s 2016 Annual Report. You may be denied coverage or face higher rates depending on your driving record.
If you’re going to protect your family’s future, the possibility of being denied insurance can be terrifying. With this information, you can work to increase your chances of approval and lower premiums by actively working to reduce your lifestyle risks.
6. Consider Critical Illness and Disability Insurance
Many people are in good health throughout their working lives. Some people, however, may develop a serious illness or suffer a disabling injury. That’s why combining critical illness and disability insurance with life insurance is often a good idea. Some employers will offer some disability and critical illness coverage through their group benefits plan. Some plans are better than others but it’s important to understand what your coverage is, and adjust your personal planning accordingly
Consider this: Would you be able to support yourself for a month if you couldn’t work? How about a period of six to twelve months, or even longer? This is why it’s important to have critical illness and disability insurance to ensure that your earning power is protected and also to ensure that your monthly payments continue to support you, even when times are tough.
7. Don’t Fixate on Premium
Life insurance is about more than just paying premiums. Your situation is constantly changing – perhaps you’ve moved in with a new partner but haven’t changed your beneficiary, or you’ve expanded your family and want to add life insurance for your children. Once a year, it’s important to review your life insurance to see if any changes are needed.
Be aware that certain life insurance policies may be subject to automatic renewal at higher rates. When purchasing an insurance policy, pay close attention to the renewal rates. Insurers rely on statistics and may assume that your health condition will deteriorate over time (e.g., as you age) and will “adjust” to that risk by charging higher premiums.
8. Understand Who (Or What) You Are Protecting
If your family is financially reliant on you, you’ll probably need life insurance to help cover costs such as your medical expenses, as well as funeral expenses after you’ve passed away. If you have children, a life insurance policy can often ensure that they are financially protected and able to maintain their standards of living, such as having a college fund set aside for them in case of death or other tragic occurrences.
While anyone going through a major life event, such as getting married, buying a home, or starting a family, should consider purchasing life insurance, other situations can benefit from it as well. Stay-at-home parents, student loan cosigners, or even your business, for example, may have a strong need for life insurance.
9. Consider Future Needs
You can purchase enough life insurance to cover outstanding debts, end-of-life expenses, and future day-to-day expenses, with a term length that matches the length of your longest financial obligation. Don’t just think about your current lifestyle; think about your future needs and what they might entail (a spouse, children or business). To understand the finer points of your policies, seek assistance from your insurance agent. Exclusions, or events that your insurance policy does not cover, are crucial to understand. Know them before you buy the insurance policy so you and your dependents aren’t caught off guard. You’re investing in your future security today by considering these factors. Life insurance is less costly than most people believe, particularly when they are young.
10. Seek Professional Assistance
Hiring an independent agent or a financial advisor to help you compare different insurers is a good idea when considering purchasing a life insurance policy. Try to find an agent or advisor with whom you feel at ease and who can explain insurance coverage to you in layman’s terms.
The advisor should be able to customize policies to your needs and clarify any policy riders (basically, add-ons to your policy).
Conclusion and Next Steps
These are just a few examples of what might help you out when buying your first life insurance policy. We hope it provides you with a baseline for understanding your current situation. Buying life insurance for the first time, like any other new experience, can often be daunting. For more information, browse the resources available on our website or contact any one of our advisors directly if you would like additional clarity.