I don’t know if it’s because I’m getting to be of a certain age, surrounded by a type of echo chamber, or because I’m studying to be a Qualified Associate Financial Planner. But the topic of life insurance has been coming up a lot lately.
And there seem to be a lot of persuasive sales techniques for what I think is the wrong type of life insurance.
So, to help clarify things and help you with your financial journey, let’s dive into everything you need to know about the right type of life insurance.
Table of Contents
Who Needs Life Insurance?
But before deciding on what type of life insurance you need, it’s important to determine if you in fact need life insurance at all.
Fourteen years ago, when J and I got life insurance, it was to cover the cost of our mortgage in case something should happen to one of us. We were a young couple not yet married, but I knew that if something happened to one of us the other wouldn’t be able to afford the house on their own.
And home security has always been very important to me. (It was one of the reasons we decided to prioritize accelerating paying off our mortgage).
We could have got mortgage insurance but decided on life insurance instead.
But life insurance can be used for so much more than just paying off debts. Here are a few other reasons to get life insurance:
- Paying final expenses (funeral expenses, terminal taxes)
- Replacing income (especially important with dependents)
- Preserving assets (not having to sell part of the estate to pay bills)
- Equalization of inheritance to heirs
If none of the above concerns you, then life insurance may not be the right product for you right now.
And I want to talk for a minute about income replacement. If you’re a stay-at-home parent, you may not be bringing in an income, but your household labour has value. Don’t make the mistake of thinking that you don’t need life insurance because you don’t work outside of the home.
As a stay-at-home parent, if you were to die, your life insurance could pay for someone to do all of the things you do. Or for your spouse to have extra time to be at home with the kids.
The Right Life Insurance Coverage
Now that you’ve determined that you need life insurance (and if you don’t, you can probably stop reading), the next step is to determine how long you need the insurance for.
There are 2 types of life insurance, term (or temporary) insurance and permanent insurance.
With term insurance, you pay premiums for a set amount of time that you have coverage for. Term insurance policies can be anywhere from 5 – 40 years. Whereas, permanent insurance is in place for the remainder of your lifetime.
Here are some factors to consider when determining the right life insurance coverage:
- Age and Need
- How long is your need in place? For example, if you’re buying life insurance to replace your income and intend to be financially independent within 20 years, a 20 year term policy may be appropriate.
- Debt
- How long will it take you to pay off debt? If you’re buying life insurance to cover the cost of debt (a mortgage, for example), then you may consider having the policy in place for the duration of the debt.
- Children
- What age are your children? If your life insurance needs are related to providing for a dependent in the case of your death, then matching the term to the age of the child may be appropriate. Side note, if you have a dependent with a permanent need (special needs child for example), then permanent life insurance may be appropriate.
- Cost
- All other things considered, what fits into your budget. The earlier you buy life insurance the lower the premiums typically are. Premiums will also be higher for a longer term compared to a shorter term.
Term vs Permanent Life Insurance
All of the different types of life insurance and their names can be overwhelming. And while there are sub categories for different types of term and permanent life insurance policies, here are some general advantages and disadvantages of each.
Advantages of Term Life Insurance
- Lower premiums
- You can align insurance need to a specific time frame
- Ability to convert to permanent life insurance option
Disadvantages of Term Life Insurance
- Higher premiums at end of term if wanting to renew
- Expired coverage at end of term
Advantages of Permanent Life Insurance
- Insurance protection for life
- Increasing death benefit through cash value accumulation
- Ability to access cash value before death
Disadvantages of Permanent Life Insurance
- Higher premiums (can be very expensive)
- Investment risk with cash value
- Frequent high-pressure sales to acquire
The Right Cost
So, you’ve determined your need for insurance and the length of time you need coverage for, the next step is getting the right cost (or saving the most money for your needs).
Like any purchase, shopping around can often result in getting the best deal for your needs. This is something I wish we had done in our process. We trusted someone we shouldn’t have and bought the wrong insurance for our needs.
Below you will find a whole section on buying the right insurance (and where to get the best price for your needs).
But before we get to that, here are some factors that will impact your insurability and therefore the cost of your premium.
- Age
- Gender
- Current health status
- Personal and family medical history
- Desired coverage
A healthy young person with no previous personal or family medical history who wants a short term with low coverage will typically have the lowest premium. And an older person with a history of personal and family medical issues will typically have some of the highest premiums (if they are deemed to be insurable).
This post may contain affiliate links, meaning I may receive a commission if you purchase through my links. Please read my disclaimer for more information.
The Right Amount of Life Insurance
Okay, so you know you need/want life insurance, you’ve decided on what coverage you need (typically term life insurance), and you want to get the best rate possible. But how much life insurance do you need?
This can be a bit trickier and may warrant working with a professional to help you run some calculations.
But to get started, you could read about 6 ways to calculate how much life insurance you need, and play around with a term life calculator to help you out.
I’m very conservative and tend to overestimate my insurance needs. Which can be good for my ability to sleep at night, but too much unneeded insurance can be costly in the long run.
The Wrong Life Insurance
You don’t find the wrong life insurance, it will find you. And it found us. When we first got life insurance we were sold/pressured/fooled into buying a universal life policy for J. But once we learned about life insurance we cancelled that policy and purchased a term life policy for him.
Whole life and universal life insurance are often heavily pushed by sales people. And while they are touted as “the best” option due to their tax-deferred investment growth.
The fact that these types of life insurance have the highest commission for sales associates is never revealed.
What are whole life and universal life insurance?
Whole life and universal life insurance are insurance products with an investment component. They are good options if you have a permanent insurance need or are an extremely high net worth individual using these policies as part of estate or tax planning.
With both options the premiums are much higher than term life insurance and a portion of those premiums becomes an investment. This investment can grow tax deferred resulting in a larger payout at death.
And although you have some input into what your money is invested in, the options are still limited.
Most people would be better off with a lower premium term policy and investing the difference on their own.
There is a tax strategy to whole and universal life insurance that make these plans attractive to very high income earners. But if you have yet to max out your registered plans (RRSP, TFSA, RESP, FHSA), these plans are not for you.
While there is a very small percentage of the population that will benefit from whole or universal life insurance, they probably aren’t reading this post.
If you’re reading this, and I was a betting person (which I’m not), I would bet that term life insurance is the right life insurance for you.
Where to Get the Right Life Insurance
Okay, enough about the wrong type of life insurance. Where is the best place to get the right life insurance? In Canada, your best option is PolicyMe.
PolicyMe is a Canadian digital insurance solution. They offer both term life insurance and critical illness insurance.
And although PolicyMe has some of the most competitive premiums rates (saving you money), and the most comprehensive critical illness coverage (covering 44 medical conditions), here are some other reasons making them the right life insurance company:
- Underwriting on application (so you know you’re covered)
- Ability to get a free online quote in 30 seconds
- Filling out a full application only takes 20 minutes
- Instant decision (you don’t need to wait for weeks to know if you’re approved)
- Most plans don’t require a medical
With PolicyMe you can get term life insurance coverage from 10 – 30 years and you can purchase coverage from $100,000 – $5,000,000. To be eligible for term life insurance with PolicyMe you will need to be between the ages of 18-75.
And for any American readers looking for affordable term life insurance, check out Fabric by Gerber. They’ve got insurance plans to fit your family’s needs.
Getting the Right Life Insurance – Summary
Ready to get life insurance? Here are some easy to follow steps for you:
- Determine your need for insurance
- Decide on length of coverage needed
- Calculate how much life insurance you need
- Get the best rate by going with PolicyMe
Final Thoughts
Life insurance is often overlooked. Maybe you think you don’t need it. But if you have dependents you should definitely consider your life insurance needs.
It doesn’t need to be daunting to get the coverage you need. Take some time to determine your needs and get your online quote with PolicyMe.
J and I both have year term life insurance policies (I have a 30 year term and J has a 20 year term). And I wish I would have known about PolicyMe when we bought our policies 14 years ago. Because premiums are based on age, it doesn’t make sense for us to switch now as we locked in lower premiums when we were younger.
So, schedule some time in your calendar to make sure your loved ones are taken care of should something happen to you. And make sure to follow the steps above to ensure that you’re getting the right type of life insurance.
Great article covering the basics of life insurance. It’s such an important topic. Both of my parents died by the time I was 18 and it was insurance that kept us afloat. My life would have been vastly different if it hadn’t been for insurance.
Although I’m sorry to hear of your parent’s early passing Jason, it’s good to hear they have coverage for the family. I find so many people don’t have adequate life insurance coverage for their needs.