Life insurance is an essential part of financial planning for most Canadians. However, many myths and misconceptions about life insurance prevent people from getting the coverage they need. This article examines some common myths about life insurance and presents the facts you need to make informed decisions.
Myths and Facts About Life Insurance in Canada
Myth 1: I don’t need life insurance because I’m young and healthy
Fact: This is one of the biggest myths about life insurance. Here are some reasons why young, healthy people need coverage:
- If you have debt like a mortgage, student loans, or credit cards, your family would be burdened by these debts if you passed away. Life insurance provides money to pay off debts.
- If you have children, life insurance ensures they are financially supported if something happens to you. The younger you are when you buy life insurance, the lower your premiums will be.
- If you’re the breadwinner in your family, your spouse/partner may rely on your income. Life insurance can replace your income for some time.
- You likely have financial goals like saving for retirement that would be derailed if you passed away prematurely. Life insurance provides an instant estate.
If someone depends on you financially, you need life insurance regardless of your age or health.
Myth 2: I have life insurance through work, so I don’t need more
Fact: Group life insurance offered through your employer is a great benefit. However, it likely only covers 1-2 times your annual salary, which may not be enough:
- Group life insurance will end if you leave your job. You’d have to qualify again for new medical insurance.
- The coverage is limited. Most experts recommend 5-10 times your income in life insurance protection.
- Group life doesn’t build cash value that you can access while living.
- You can’t customize group life insurance to meet your specific needs.
Having an individual life insurance policy in addition to group coverage ensures you have sufficient protection that will continue if your employment situation changes.
Myth 3: I can only get term life insurance, not permanent insurance
Fact: It’s a myth that people with health issues can’t qualify for permanent life insurance. Permanent life insurance options include:
- Simplified issue life insurance: Offers coverage up to $500,000 without a medical exam. You only have to answer a few health questions.
- Guaranteed issue life insurance: Guarantees coverage up to $50,000 without health questions or exams. There is a 2-year waiting period before the full benefit applies.
- Rated policies: If you have a health condition, an insurance company will charge you a higher premium to cover the added risk. But coverage is still guaranteed.
- Term-to-100 life insurance: Provides permanent coverage with level premiums but no cash value accumulation. It is easier to qualify for than traditional permanent insurance.
So, even with health issues, work with an experienced insurance advisor to explore your permanent life insurance options. You may be surprised at what’s available.
Myth 4: I should buy from whoever offers the cheapest quote
Fact: Life insurance rates can indeed vary between insurance companies, even by hundreds of dollars for the same coverage. However, choosing the cheapest policy isn’t always the best idea because:
- Cheaper premiums may mean lower-quality coverage or weaker benefits. Always compare policies in detail.
- Discount insurers often spend little time assessing your needs. An experienced local advisor does a complete needs analysis.
- Claims experience may be less favourable with discount insurers versus established companies.
- Cheaper insurers often have lower financial strength ratings. Choose a company that will be around to pay your claim.
Saving money is excellent, but not if it means compromising on coverage and service. Work with an advisor to find quality protection from a highly-rated insurance company at a competitive price.
Myth 5: I can save money by lying on my insurance application
Fact: This is one of the most dangerous myths about life insurance! Lying on your application is called misrepresentation and can result in your claim being denied. Here’s why you should always be truthful:
- Insurers will verify your information against medical records and the MIB industry database. Any inconsistency could void your coverage.
- Disclosing health or lifestyle issues doesn’t mean you’ll be declined. You may pay a slightly higher premium but still get guaranteed coverage.
- If you lie and the insurer finds out later, they can rescind your policy and refund your premiums. Your family would get nothing!
Accurate information ensures your loved ones receive the life insurance benefit you planned for. An experienced advisor knows how to represent higher-risk clients honestly to get coverage.
Myth 6: I should borrow from my life insurance policy to invest
Fact: You can take tax-free loans from a permanent life insurance policy up to your cash value amount. However, here are the risks of borrowing from life insurance to invest elsewhere:
- If you die before repaying the loan, it’s deducted from your death benefit, reducing protection for your family.
- If investments underperform and can’t cover loan interest, your policy risks lapsing, causing income taxes on gains.
- Interest rates on policy loans are generally higher than average investment loans.
The primary purpose of life insurance is to provide financial protection to your family if you pass away, not investing. Work with a financial advisor to keep protection and investment objectives separate.
Myth 7: I don’t need life insurance in retirement
Fact: Many Canadians let life insurance lapse when they retire, thinking they no longer need coverage. But protecting your financial legacy in retirement is wise because:
- Your spouse may still depend on your retirement income and pension if you pass away first. Life insurance can replace that income.
- If you die first, your spouse’s final expenses come from your estate unless you have life insurance to cover funeral costs specifically.
- Estate taxes can be minimized with life insurance. Taxes erode the value of your RRSP, or TFSA gets paid to your estate. Life insurance proceeds bypass your estate.
- You can access cash value from a permanent life insurance policy tax-free to supplement retirement income (via loans or withdrawals).
Life insurance’s role evolves in retirement, but it’s still a valuable component of your financial plan. Consult an advisor about how to structure protection to meet changing needs.
Myth 8: I should buy insurance online directly to save commissions
Fact: Purchasing insurance online or through a call centre with no agent could have disadvantages:
- Online insurers offer only their products. An advisor can access policies from dozens of companies to best meet your needs.
- Direct insurers may need more flexible underwriting processes. An experienced advisor can get higher-risk clients approved by a suitable carrier.
- Direct purchase puts the onus on you to determine how much and what kind of coverage you need. An independent advisor does a detailed needs analysis.
- If issues arise, customer service may be lacking without a live agent to assist you.
Always work with a licensed advisor to understand your protection needs, navigate options, and get guaranteed coverage. Value their expertise instead of trying to DIY insurance.
Myth 9: I can save by cancelling my old policies and getting one new policy
Fact: Replacing your existing life insurance policies with a new single policy may seem appealing. But the cancellation of old policies before understanding the full impact has risks:
- You likely lose grandfathered benefits from old policies that new policies won’t have.
- Surrender charges may apply if cancelling policies before maturity dates.
- Higher premiums on a new policy if health has deteriorated.
- May need to medically re-qualify for new coverage if the old policy was guaranteed issue.
The better option is to review in-force policies with an experienced advisor to understand their benefits and costs. Then, supplement existing coverage as needed vs. replacing.
Myth 10: My insurance advisor wants a commission
Fact: Insurance agents and brokers are paid a commission by the insurance company when you purchase a policy. However, a commission covers critical value-added services:
- It takes time to understand your financial situation and insurance needs. You receive professional advice tailored to your circumstances vs. a one-size-fits-all policy.
- Educates you on different insurance companies and policy options to find the best solution. Online purchases give limited choices.
- Negotiates with multiple insurance carriers to get you the lowest premiums available for your situation.
- Assists you through the claims process to ensure you receive your full policy benefit.
- Provides ongoing policy reviews and recommendations as your needs change over time. DIY purchases are transactional.
Consider commissions as reasonable compensation for an advisor’s expertise and services – not their sole motivator.
Final Thoughts on Life Insurance Myths and Facts
Many misconceptions about life insurance lead people to put off getting coverage or make unwise choices. By learning the facts, you can move forward confidently to protect the financial well-being of your loved ones.
An independent insurance advisor has the expertise to guide you through securing the right policy from a reputable and financially sound insurer at a competitive price.
