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The importance of life insurance, and the ways in which it can benefit you

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In this Padlet, you will find information about life insurance, as well as an abundance of resources about the topic

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This site gives a brief Introduction to life insurance. Life insurance can grant financial security to your loved ones after you die. This can be especially important for people with families that depend on them for financial support. The cost of life insurance can depend on many things including the type of insurance you’re getting, as well as your age, gender, health, medical history and lifestyle. This site provides some great introductory information about life insurance, as well as some good resources for you to find out which type of life insurance will best suit your needs.

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Protect the financial security of your loved ones with life insurance including term insurance, permanent insurance and universal life insurance policies.

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This article gives some good insight to the importance of life insurance, as well as how much you need and what type you might need. The article also gives information about other types of insurance that could be chosen instead of life insurance such as disability insurance and critical illness insurance. This article gives some useful advice as to what some benefits are of each type of life insurance, as well as with different term lengths for each type of insurance.

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Question from Maha Anj through our GenYmoney Facebook group: What are your thoughts on life insurance/critical illness insurance? Is it best to go through an insurance broker or do it on your own?

Answer from Benjamin Felix, an associate portfolio manager with PWL Capital in Ottawa.

Life insurance

If there is anyone relying on you financially, you need life insurance. The day that you die, your income stops. But your dependants will still have to pay for your mortgage, groceries, heat and all of the other bills. Life insurance should replace your contribution to the household budget for as long as your family needs it to. For example, if your family needs you to cover at least $2,800 a month of household expenses to maintain their lifestyle for the next 20 years, you would need $500,000 of life insurance coverage, assuming a 5-per-cent after-tax rate of return and 2-per-cent inflation.

People have the greatest need for life insurance early in their adult lives when there are minimal financial assets coupled with high costs, such as child care, and significant debt, such as a mortgage. The unexpected death of a spouse at this stage of life would be financially devastating. Conversely, a retiree likely has substantial financial assets in investments or pensions, independent children and minimal debt. The death of a spouse at this stage of life would have less of a financial impact.

There are two main types of life insurance: term insurance and permanent insurance. Term insurance has a guaranteed premium (cost) for a fixed term, usually 10 or 20 years. After the term has expired, the premium goes up, often substantially. If the insurance planning was done well, your life insurance need at the end of the term will be minimal, and you can cancel the policy instead of paying the higher renewal rates.

Permanent insurance has a fixed premium forever, but it is more expensive. This makes sense from the perspective of the insurance company - term insurance is cheap because you are unlikely to die in the 10 years between the ages of 30 and 40, but permanent insurance is expensive because you are guaranteed to die eventually.

There are multiple forms of permanent insurance. The simplest form is Term 100, which is like a term-insurance policy that has a fixed premium until the age of 100. Whole-life insurance is similar in that it is payable with a fixed premium until 100, but it also has a cash value building up in the policy over time. You can borrow against the cash value, or use it as collateral for a loan, and you keep the cash value if you cancel the policy. In most policies, the cash value also earns non-taxable interest over time. Limited-pay whole-life is similar to whole life, but the premiums only need to be paid for a fixed number of years, and then the policy is guaranteed until death.

The costs for each type of life insurance are verydifferent, making choosing the right one important. Let's compare the monthly cost of a $500,000 life insurance policy for a 30-year old of average health. I have used Term4Sale for this comparison, a free online tool that anyone can use.
Data source: lowest cost policy of each type on Term4Sale.ca
Based on the lower cost of term-life insurance, and the typically declining need for life insurance over time, term-life insurance tends to be the most sensible solution for most people.

Permanent life insurance is often positioned as an investment; it's similar to the rent vs. buy debate for home ownership - why rent your life insurance when you can be building equity (cash value) in the policy? The reality is that permanent life insurance is not a very good investment for most people. It has high built-in costs, a high cost of insurance, low returns and the funds in the policy cannot be easily accessed.

Permanent insurance can make sense for tax and estate planning in a few very specific cases, but unless you currently have wealth in excess of what you will require in your lifetime to cover your own needs, I would approach permanent life insurance with skepticism.

If you do not have a life insurance need now but want to buy term-life insurance now while you are younger, healthy and the rates are lower, I see no problem with that. It is so inexpensive it's almost like deciding whether or not to keep Netflix.

Disability insurance

Like life insurance, if you are earning an income and have anyone relying on your income, you need disability insurance. You are far more likely to become disabled than you are to die prematurely. Personally owned disability insurance is often hard to get. The underwriting process - the process where the insurance company decides how risky you are - is rigorous, and coverage can, in many cases, be declined.

On the other hand, many employers will offer disability insurance as part of their group benefits package. Group disability insurance is much easier to qualify for, but it will typically only cover you for two years of "own occupation" - this means that the benefit continues to pay for two years if you can't go back to your own occupation, but it goes away after two years if you can go back to a different, potentially less desirable, occupation. If you are unable to return to any type of work, the disability insurance will typically pay to the age of 65.

Generally, if you are in a specialized field earning a high income, it makes sense to have your own disability policy with a longer "own occupation" period, even if you have group disability insurance. You need to have an income to insure in order to qualify for disability insurance.

Critical illness insurance

Critical illness insurance pays you a lump sum if you are diagnosed with a covered illness; there are typically 25 of them, including heart attack, stroke and cancer. You should not consider critical illness insurance until adequate life insurance and disability insurance are in place. Let's think about why this is true.

If you are diagnosed with a covered illness and you die, your family is covered by life insurance. It is also worth noting that if you die from a critical illness within 30 days of diagnosis, a critical illness policy does not pay.

If you live through the illness, but become disabled, then disability insurance will kick in, delivering a much more valuable long-term benefit.

Sure, a lump sum of cash could be nice to cover expenses when you become sick, but you should have enough savings to cover three to six months of expenses on hand anyway. Maybe there is an argument that critical illness insurance will give you the cash to seek additional or experimental medical care, but that seems to me like buying a lottery ticket that pays if you get sick.

In most cases, critical illness insurance does not replace financial loss in the way that life and disability insurance do, so it is not a necessary part of a financial plan. What critical illness insurance does do is give you a lump sum of cash at what is presumably a terrible time in your life. If it gives you peace of mind, I see no problem with buying a small amount of critical illness insurance. It is more of an emotional decision than a financial one. For a 30-year old male or female, a Term 20 critical illness policy for $50,000 might cost around $25 a month.

There are some cases, such as self-employed people who have trouble qualifying for disability insurance, where critical illness insurance could be thought of as a substitute for disability insurance. Keep in mind, though, that critical illness insurance only pays once. It will not be helpful in the event that a covered illness results in a long-term disability.

Insurance is heavily regulated and must be purchased through a licensed life and health insurance agent, so there is no DIY route. With all of the tiny details that can differentiate one policy from another, it is probably worth dealing with an agent anyway. One word of caution is that insurance agents receive commissions based on the products that they sell you, and products with higher premiums pay higher commissions. Keep this is mind when evaluating insurance advice.
Are you a millennial with a question for our adviser? Sendit to us. You can also join the Gen Y Money Facebook group.

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Do I really need life insurance? The costs vary greatly so choose with care

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Question from Maha Anj through our GenYmoney Facebook group: What are your thoughts on life insurance/critical illness insurance? Is it best to go through an insurance broker or do it on your own? Answer from Benjamin Felix, an associate portfolio manager with PWL Capital in Ottawa.

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This article provides some important information about life insurance for anyone who owns or is interested in owning life insurance. This article gives advise and tips about owning and purchasing life insurance. One of the most important things to know about life insurance is getting enough money out of a death benefit. This article recommends around 15 times your yearly wage, so that the income is able to support your family after your passing.

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Life insurance is one of the pillars of personal finance, deserving of consideration by every household. I'd even go so far as to say it's vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance.

Perhaps this is due to life insurance's complexity, the posture of those who sell it or merely our preference for avoiding the topic of our own demise. But armed with the proper information, you can simplify the decision-making process and arrive at the right choice for you and your family.

To help, here are 10 things you absolutely need to know about life insurance:

If anyone relies on you financially, you need life insurance. It's virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone's ex-spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to be no more, then you don't need life insurance. You may, however, consider using life insurance as a strategic financial tool.

Life insurance does not simply apply a monetary value to someone's life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. Strategically, it helps those left behind cover the costs of final expenses, outstanding debts and mortgages, planned educational expenses and lost income. But most importantly, in the aftermath of an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one. In addition, life insurance can provide valuable peace of mind for the policy holder. That is why life insurance is vital for the bread winner of a single-income household, but still important for a stay-at-home spouse.

Life insurance is a contract (called a policy). A policy is a contract between a life insurance company and someone (or occasionally something, like a trust) who has a financial interest in the life and livelihood of someone else. The insurance company pools the premiums of policyholders and pays out claims-called a death benefit-in the event of a death. The difference between the premiums taken in and the claims paid out is the insurance company's profit.

There are four primary players, or roles, in a life insurance policy. These roles belong to the insurer, the owner, the insured and the beneficiary. The insurer is the insurance company, responsible for paying out claims in the case of a death. The owner of the policy is responsible for premium payments to the insurance company. The insured is the person upon whose life the policy is based. The beneficiary is the person, trust or other entity due to receive the life insurance claim-or death benefit-in the case of the insured's passing. For example, I am both the owner and the insured for two life insurance policies (with two different insurers, as it happens). My wife is the beneficiary of each. We walk through the numbers together at least annually (and after major arguments, to prove that I'm still worth more alive!).

Life insurance is a risk management tool, not an investment. While some life insurance policies have an investment feature that can offer a degree of tax privilege, insurance is rarely an optimal investment. There's usually a better, more efficient tool for the financial task you're trying to accomplish. If you haven't yet filled up your emergency cash reserves, paid off all non-mortgage debt, maxed out your 401(k) or Roth IRA, contributed to an education savings plan (where appropriate) and set money aside for large purchases you expect in the next decade, then you likely need not concern yourself with types of life insurance that contain an investment component. (You'll see why in #7.)

There are two broad varieties of life insurance about which you should become aware-term and permanent. Term life is the simplest, the least expensive and the most widely applicable. With term life, a life insurance company bases the policy premium on the probability that the insured will die within a stated term-typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, after which the policy becomes cost-prohibitive to maintain or you decide to let it lapse. Yes, this means that you may very well pay premiums for decades and "get nothing out of it." But that's good news, because it means you're winning at the game of life.

Permanent life insurance includes this same probability-of-death calculus, but also includes a savings mechanism. This mechanism, which is often referred to as "cash value," is designed to help the policy exist into perpetuity. Whole life-the original-has an investment component much like bonds or CDs (but backed by the insurance company). Variable life offers investment options more like mutual funds. Universal life was designed as a less expensive permanent life insurance alternative with added flexibility, but increased interest rate risk for the owner. Although they tend to be more complex and expensive, there are financial dilemmas-often related to business planning and/or high-net-worth estate planning-for which permanent life insurance may be the only solution. There are a few select instances where permanent policies are engineered to maximize the tax-privileged growth of cash value. They are, however, only appropriate for a small number of people and still dependent on numerous other factors to work the way they're intended.

Life insurance can be extremely expensive, but it can also be surprisingly inexpensive. If you apply for a bells-and whistles permanent policy, the size of the premiums alone might cause you to need a life insurance benefit right then and there. But most people are pleasantly surprised when they see the relatively low premiums of a plain-vanilla term policy. A healthy, non-smoking, 30-something male, for example, might pay less than $500 per year for a 20-year term policy with a million dollar death benefit. That same individual might be required to pay 10-or even 20-times as much for a variable or whole life insurance policy with a matching death benefit. No, a term/perm comparison is not apples-to-apples. I would hazard to guess, however, that a recent widower cares little for bells-and-whistles but a great deal for the death benefit. Of course, a smoker will likely pay twice as much for any of the above. Someone with health problems could pay triple or more (or simply be declined for coverage).

Determining the optimal life insurance policy for you doesn't have to be complicated. While we could get really granular with a detailed life insurance needs analysis, it's more important to get set up with something you can comprehend than it is to push off an important decision due to life insurance's intimidating complexity. In the vast majority of situations, a household would be well cared for simply by buying enough life insurance to replicate all or most of the insured's income for a term as long as the household expects to need that income.

Therefore, consider this simple but effective strategy for determining how much life insurance your household needs. Multiply a wage earner's income by 15 and purchase a policy with an equivalent death benefit for a term that extends until the person insured would presumably retire. Why 15? Because it works. But it works because it results in a number that should re-create 75% of a wage earner's income if the death benefit was conservatively invested to earn 5% (hopefully plus a bit more for inflation) annually. Here's an example:

Dave makes $100,000.

$100,000 x 15 = $1,500,000 of death benefit

$1,500,000 earning 5% annually produces $75,000 of income.

Consider using a live person to help in your death planning. There are many online tools that can help give you an idea of how much money you should pay for the policy you need. But once you get to that point, I would recommend contacting a real, live insurance agent who can walk you through the application and underwriting process. The premiums at a given insurance company are identical whether you apply online, via a toll-free number or with a person. Indeed, a knowledgeable and dedicated insurance broker or agent may help you save money by choosing the best carrier for your particular situation. Underwriting, by the way, is the necessarily tedious process through which the insurance company classifies how much of a risk you are, based on your current health, past health, the health of your parents and siblings and enough other questions to make anyone blush. Answer truthfully-but succinctly.

Know your options when cancelling an existing life insurance policy so you don't leave money, or coverage, on the table. If you have a policy that isn't appropriate for you-or you simply no longer need it-it's important to proceed carefully. First, if you realize that you have overpaid for a policy that doesn't meet your needs, but you still need life insurance, don't cancel the wrong policy until the right policy is in place. Who knows, you could learn of a health complication that is going to lead to you being declined for the new policy. Then you'd be left without any coverage. If you have an existing term policy you no longer need, you can simply cease premium payments and it will go away. If you have an unnecessary permanent policy with a cash value, however, you should analyze its present and expected future investment value, as well as any prospective tax complications, before cashing it in. You can do so by requesting an "in-force illustration" and a "cost basis report" from your agent.

I suspect we don't love talking about life insurance because we don't like talking about death. No shocker there. But open and honest discussions about planning for an unexpected death can be surprisingly life-giving. And even if you don't buy that, the chances are good that purchasing life insurance is still an important part of your long-term and comprehensive financial plan.

This post is part of an invaluable series pulled together by Forbes: "100 Things You Absolutely Need To Know About Money Before You're 35."

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10 Things You Absolutely Need To Know About Life Insurance

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Life insurance is one of the pillars of personal finance, deserving of consideration by every household. I'd even go so far as to say it's vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance. Perhaps this is due [...]

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Video 1: Life Insurance 101 https://youtu.be/67iiYbGJoVk

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Video 1: Life Insurance 101 https://youtu.be/67iiYbGJoVk

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This short video acts as a great introduction to life insurance and provides some very basic information about the importance of life insurance, what life insurance can do for you, and how much life insurance you will need to suit your needs.  This video gave me a good introduction to many important aspects of life insurance, as well as providing some good resources to learn more about life insurance and how life insurance can help you.

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Video 2: Types of Life Insurance Explained https://youtu.be/YPpdpjZ5yEw

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Video 2: Types of Life Insurance Explained https://youtu.be/YPpdpjZ5yEw

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An informative video about the three different basic types of life insurance available to you. These types are Term Life insurance, Whole Life insurance and Universal Life Insurance. Term life insurance is insurance that is usually cheap, but typically only lasts between 10-30 years. Whole Life and Universal Life insurance area meant to last forever. Universal Life insurance is flexible and is meant to change based on changes in your life. Whole Life insurance is the most expensive of these, but does more for you and grow in value each year. This video gave me a useful insight to each type of life insurance, as well as the major benefits of each.

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Video 3: Is term life insurance right for me? https://youtu.be/ntcsxLEBK_I

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Video 3: Is term life insurance right for me? https://youtu.be/ntcsxLEBK_I

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This video discusses term life insurance in more depth, and discusses some of the benefits of it, as well as how to know whether term life insurance is the best type of insurance for you. Term life insurance is the cheapest type of insurance, and the cost of it is determined by factors such as your age and health, which make it a great option for younger people. This video gives some good information to help you to determine if term life insurance is the best kind of insurance for you, as well as helping you figure out how much you need to get for it be effective for you.

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A good infographic that discusses the types of life insurance and the different benefits and reasons for getting each type.

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An infographic that provides some information and facts about life insurance and some statistics about life insurance. This infographic shows some good information to know if you’re interested in life insurance.

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This image shows some information about permanent life insurance and discusses the pros and cons of each type of permanent life insurance, which is useful for anyone thinking of purchasing permanent insurance and is weighing the different types.