Life insurance shouldn’t be one of those things you put off thinking about—because you (and the people who depend upon you) could need it at any time. But many do wonder if it’s worth the monthly premiums. But what about you, how do you know if it’s necessary for you? And why do we need life insurance anyway? Let’s find out.
“In general, life insurance is most necessary when you have dependents who would be impacted financially by your death,” says Lorne Marr, the founder of LSM Insurance, an insurance brokerage in Markham, Ont. “Typically, life insurance is used as a way to pay off a large debt, such as a mortgage on a home that you want to leave to your heirs.” But technically, you do not need life insurance. It’s not required by law in Canada, like car insurance.
Why you may need life insurance
If you have a spouse and kids, ask yourself this question: What do you want to happen to them when you’re gone? Chances are, you want them to continue living the same lifestyle—the last thing anyone wants is to think of their loved one’s dealing with financial uncertainty, or having to move when they’ve just lost you.
If you have dependents, you probably need a life insurance policy. It can take care of things like settling debt obligations (mortgages, auto loans, credit card bills), keep them in their existing family home, and cover everyday living expenses. Beyond that, it can support any plans for the future (the cost of your children’s post-secondary education, for instance).
If you’re single, and no one is actively depending on your income, a life insurance policy is still worth considering. Coverage can handle any debts, those inevitable end-of-life expenses (such as your funeral arrangements), and leave money behind to loved ones or favourite charities.
Why you may not need life insurance
If you’re single, with no dependents or debts, and have enough savings and assets to cover all your funeral expenses and giving to family, then it’s probably not necessary. The same goes if you have a family, but are financially set up in a way that would leave them well-cared for (ie. a paid-off house, no debt, lots of savings tucked away for funeral expenses, everyday living expenses, education etc.).
Why it depends…
You have a mortgage
A life insurance policy isn’t required for a mortgage in Canada, but it’s recommended. “It’s just smart to have,” says Jason Roy, a financial security advisor and managing partner at Adkins Financial in Brantford, Ont. “Your mortgage is most people’s largest expense and usually taken out on a couple’s total income. When something unforeseen happens, the last thing you want to be doing is making decisions because you are financially forced to.”
You’re single and have debt
Really, it still depends on your situation and what the life-needs analysis says. That will take into consideration things like age, outstanding debts (including mortgages, car loans, credit cards and student loans) into consideration. It would also look at your assets and savings and see if they’re enough to cover your debts. It would also take into consideration future plans to start a family, or leaving things behind to family members or charities.
Still unsure? Here are more scenarios
Retired, with no dependants
Katerina is a single 70-year-old woman with a reasonable mortgage of about $115,000. With no dependents, and living on a limited budget, doesn’t want to get insurance if she doesn’t need to.
The verdict: “You do not need life insurance,” says Marr. For those who do want the reassurance of leaving money behind, however, “in many of these cases, a term life insurance policy is often the most inexpensive choice and the full face value of the policy pays out on the policy holder’s death. This is also a great option for many families who often get mortgage life insurance instead, which is more expensive than term life and the payout declines as the face value of the mortgage declines. Other popular reasons for having life insurance include: Income replacement for dependents; to pay off debt like a mortgage or a line of credit; to create an emergency fund; to cover final expenses incurred upon your death; for estate planning reasons or to leave money to a favourite charity. If none of these apply to you and none of these circumstances are part of your overall financial plan, then save your money.”
Young and single, with some debt
Steven is a 30-year-old single male with no kids or dependents. He rents an apartment, has a small car loan of $15,000 and credit card debt of $3,000, but has savings of $50,000.
The verdict: No. “Assuming the client does not want to leave behind anything for their family or charity should they pass away, life insurance would not be required at this time,” says Adam Mitchell, president of Mitchell & Whale Insurance Brokers Ltd., in Whitby, Ont. “Their current savings is enough to cover their outstanding debts as well as cover their funeral expenses, so life insurance would not be required at this time.” But if this client eventually buys a home, gets married or decides to start a family, it would be wise to revisit life insurance.
Married with children and a mortgage
Angela and Ryan, both 45 years old and married with three children, have a mortgage of $350,000, credit card debt of $4,000, and car loans totalling $40,000. They have savings of $200,000 and no other tangible assets.
The verdict: Yes. “With debts totalling $194,000 over savings, and three dependents, there will be a need for life insurance,” says Mitchell. “The total amount would be determined by a complete life needs analysis.” Depending on the results of that analysis, and the budget the client has, there may be a wide variety of options. This may include but is not limited to a joint first-to-die, joint last-to-die or separate term policies may be offered. Whole life policies may also be offered for additional coverage focused solely on the family’s long-term financial planning.
Established with good savings
Karen, a 60-year-old widow with no dependents, rents a condo, holds a $10,000 car loan and $4,000 in credit card debt. She has savings of $400,000 and no other tangible assets.
The verdict: No. “This client has enough savings to reasonably cover all of their debts and final expenses, as well as leave behind money to family or charity if they wish,” says Mitchell. “No life insurance would be required for this client.”
Some quick questions about how life insurance might affect you
Is a physical a deal breaker?
A trip to the doctor’s office can seem like the last thing you want to do right now, but you may not need to. “It really depends on your age and coverage amount you are applying for,” says Roy. Either way, you’ll likely still be asked a lot of health questions to figure out how big of a risk you are, about your habits, medical history and family medical history, so have that info ready and be mentally prepared.
What won’t life insurance cover?
Some causes of death may affect your life insurance coverage. “Death by suicide within the first two years of inception won’t be covered by insurance,” says Roy.
There might be other exclusions like extreme sports (think: rock jumping, parasailing). Also, if you misrepresented yourself, that’s a no-go, says Roy.
What happens if I decide to drop my life insurance policy?
It really depends on what type of coverage you have. “For example, most term policies do not generate a cash value, so if they are cancelled the policy is voided,” says Mitchell. “However, with a whole life or universal life policy, there may be a cash value at the time of cancellation that would be paid out to the insured.”
But, there’s a catch: “This cash value may be subject to a surrender penalty, which would be determined by how long the policy has been in force and the penalties listed in the policy.”