Life Insurance Tips for Canadians
The primary purpose of life insurance in Canada is to move the financial risk faced by those you leave behind to the company if you make an early exit. There are essentially two types of Life coverage – temporary life and permanent life insurance. Most people have some type of temporary life coverage either as a term policy, a mortgage policy with say a bank, or a group life policy (likely through work or an association plan like an automobile club). Some also have permanent life either in the form of whole life, universal life, or Term to 100 Life Insurance. Please refer to the discussion on permanent life coverage for more details.
The purpose of a Canadian Term life policy is to provide cash in the event of your death so those who depend on you will have the money to:
- Settle your debts-mortgages, lines of credit and loans (business & personal)
- Remove guarantees by paying off the debt
- Make up for the income you provided to the family-Remember the impact of inflation when doing this calculation. At 3% inflation, a need to supplement income by $25,000 will grow to $50,000 in 24 years.
- Provide for children’s education, marriage etc.
- Complete the funding for your spouses retirement plan-very important and why many need some term insurance to age 65-this is a consideration for those looking for permanent coverage as well.
- For businesses, it can fund a buy/sell agreement or to provide insurance on a key employee to provide cash to find a new person, absorb the financial shock of the loss and have additional funds to pass on to the family of the deceased.
You can see the temporary nature of term insurance. It has a specific relatively short term purpose which will generally not apply after age 65 and usually starts to reduce well before that age. The need usually starts to decrease as the family leaves home, and mortgages or loans get reduced or paid off. Term life insurance can be very inexpensive for the amount you are buying ($1 million can cost between $32 for a 25 year old very healthy male non smoker and $150 per month for a 40 year old male smoker). It depends on age, sex, smoking habits and lifestyle issues.
Term life insurance generally comes in 5, 10, 15, and 20 year terms although it is now available for longer periods to provide coverage for longer mortgages and longer term planning. This means that the life rates are guaranteed for that period of time and they will automatically renew at a higher rate for the next term period. For example, a 10 year term insurance policy has guaranteed rates for the first ten years and then you can renew it for another ten years without a medical at a guaranteed premium contained in the policy. Do not renew term life insurance it if your health is good as the renewal rates can be several times the premiums if you shop around for a new term insurance policy. The assumption is that you only renew term insurance if you are too sick to get a new life insurance policy.
How much life insurance do you need to buy in Canada?
You need to consider all of the reasons for having a term policy mentioned above. We have provided a calculator to determine the amount of temporary coverage you need. Please click here to go to it.
8 Tips To Save You Money On Term Life Insurance
Money Saving Tip 1:
Purchase the coverage for your mortgage or line of credit from an independent life broker who will broker your needs rather than a financial institution like a bank. There are a number of reasons in addition to price to purchase from a broker (click here for summary table). However, price is also important and the older and healthier you are, the greater the savings by using a life broker to get you the best life insurance quotes.
Money Saving Tip 2:
Over half the people renew their term life insurance policies and pay these high premiums-get a new term insurance policy-with preferred term rates it might be less than you are currently paying for the old life insurance policy.
At one time, life premiums were divided into smokers and non-smokers. However, the life companies now have statistics that enable them to determine those who are least likely to die based on lifestyle, family history and blood pressure and some measurements they get from blood samples, such as cholesterol levels. About half the people will qualify for a preferred term life quotes. At the time of this writing, a 35 year old should be able to purchase $500,000 of term life insurance for about $28 per month at regular rates but preferred term insurance rates could be as low as $21 per month. Some companies also offer a preferred term rates for smokers if they would qualify for a preferred insurance rates but they smoke.
Finally, there is the issue of convertible. You will see most term insurance policies are renewable which means you can renew them for another term of say 10 years and they are also convertible. Convertible means you have the right to convert all or part of the policy to a Permanent Insurance Policy at any time during the term without a medical. You just pay whatever the rates are at the time of conversion. If your term policy was issued on a preferred basis some will allow you to convert on a preferred basis if they have preferred universal life rates. This is an inexpensive option that is usually built into the policy cost and worth the extra price. A few companies will offer policies without this conversion option for a small savings.
Money Saving Tip 3:
Ask for preferred life insurance rates. Refer to the sample questionnaire to see if you would qualify at Preferred Life Insurance Rates.
Money Saving Tip 4:
There are significant differences between some life insurance companies in the percentage of people who will qualify for preferred term insurance rates ranging from under 50% to over 75%. Ask us about this.
Money Saving Tip 5:
If you are a smoker of the occasional cigar, some life insurance companies will consider you to be a non-smoker.
Money Saving Tip 6:
One of the questions we address is should I lock my life rates in for 10 or 20 years? Many will want ten years as it is the cheapest way to buy life insurance but it assumes either there will be no need for life insurance after ten years or that your health will be good and you can purchase a new cheap ten-year term policy at that time. In this case, you are saving the difference between the ten year term policy cost and the 20-year term cost by taking on the risk that you will be healthy in ten years.
Those who choose to take a 20-year term insurance policy, they pay more up front but the risk that they will not be insurable in ten years is zero as they have locked it in for 20 years. For example, a 30-year-old would pay $27 for $500,000 of ten-year term insurance and then in ten years when they are 40 years of age it would cost $40 to purchase another 10-year term insurance policy assuming he was a standard insurance risk in both cases and prices are similar to what they are today.
On the other had, he could buy a $500,000 term insurance policy with a 20-year term for $38 at age 30. So he is saving $11 for the first ten years and it is $2 more for the next ten years when he purchases a new 10-year term insurance policy at age $40*. This assumes he is of good health. If not, the renewal rate at age 40 for the policy he took out at age 30 is $79 per month which is twice what the 20-year term policy cost up front. So, he is assuming the risk that he will be healthy in 10 years and can then purchase a new life insurance policy and if he is wrong, the cost is another $41 a month to renew his existing policy or a total of $78 per month. So, he saves $11 per month for the first ten years but has to pay $2 per month for the second ten years and he runs the risk of having to pay another $41 per month to renew his policy over the 10-year rate (a total of $78) if he is unable to purchase a new policy at age 40.
Money Saving Tip 7:
Select life insurance companies with the lowest renewal rates. The above example used Unity Life for the ten-year term policy at age 30. They have one of the lowest renewal rates if you are not healthy and have to renew your life insurance policy in 10 years. If you are using this strategy and gambling you will be healthy, make sure you choose a company with the lowest term insurance renewal rates if the premiums are similar. In this case Unity Life had a renewal rate of $78 but the other four lowest cost companies were $83, $94, $95 and $105 with RBC being the highest.
Money Saving Tip 8:
If you have group insurance through an association or group at work, consider replacing all or part of it with your personal term life insurance policy. First, as you age the cost of these group policies increase significantly and will frequently become more expensive just when you need it most. Further, if you leave the group or employment, while you might have an option to convert it is usually to a prohibitively expensive policy. Have a base life insurance policy that is yours and controlled by you and augment it with a group policy so that if you leave or it becomes too expensive, you can drop it.
“It is not expensive to move the financial risks to your family of your death to an insurance company and it is the responsible thing to do”
* Based on term life insurance rates from life-guide February 24, 2009