Insurance everyone needs to consider

Insurance everyone needs to consider

The following is a guest post with LSM Insurance. 

Let’s face it.  Life insurance and insurance is general while critical to financial planning is not exactly a sexy topic.  Now that I wrote the word “sexy” maybe I have your attention!

Whether you’re young and single, young and married, you have children to put through school, or you’re getting ready to enjoy your empty nest, insurance to protect yourself or your family against a catastrophic loss should already be part of your financial plan.  If not, this post will turn you in the right direction.  Let’s look at some questions you should be asking yourself when it comes to insurance and some insurance products that may help answer those questions.

What to ask yourself before buying anything

Most needs in life, notably financial ones, start by recognizing you have a need in the first place.  Consider answering these questions when it comes to identifying your insurance needs:

  • How much present income do I need to sustain the lifestyle? (consider all current financial obligations, such as household bills, mortgage payments, car loans, and more)
  • How much future income will I need to uphold the lifestyle? (consider all future financial obligations, such as long-term mortgage debts, lines of credit, children’s education costs, and more)
  • How much money will be needed at time of death? (consider funeral expenses, outstanding medical bills, estate-settling costs, and more)

Answers to these questions may not be top of mind but they are important to figure out, to own the right types and right amounts of insurance.  Consider these products, for these reasons.

Go Short, Go Term!

You may already know life insurance is generally grouped into two (2) major buckets:

  1. Temporary
  2. Permanent

Temporary Insurance (Term Insurance) – Term insurance may be popular for people with mortgages, small business owners with debts or entrepreneurs experiencing major start-up costs.  If these costs (or risks) will not last forever, term can be a good choice.  Consider term insurance for 10 or 20 years.  I think term insurance is a good product for short-term financial obligations.  In our case, we have term insurance and we intend to keep it at least until our home is paid off.

Go Long, Go Permanent!

If you’re planning on renewing term insurance a few times over during your lifetime then permanent insurance could be a way to go. Let’s take a look at some selected types of permanent insurance.

Whole Life

These policies are generally structured to last your entire life and thus provide a guaranteed benefit.  For some whole life policies there is a cash value that builds up over time so the insurer can take advantage of that cash value or cash surrender value (CSV) later in life if they so choose.  There is more to this type of insurance and I’m just scratching the surface.  I think guaranteed whole life insurance in particular might be a good choice for long-term financial obligations and for the CSV available, should the insurer decide to take it.

More than Whole Life?

Guaranteed whole life isn’t the only type of permanent life insurance to consider.  Other permanent policies may include universal life and term 100 insurance.  Universal life actually has two components associated with it, an insurance component and an investment component.  It’s important to understand how these components work since one might assume the investments are always guaranteed.  They are not, and that’s an entirely separate post I hope to cover at some point on my site.

Term 100 is yet another product.  Premiums for term 100 insurance are set for life but the policy has no cash surrender value.  I would consider speaking to a life insurance professional before buying any insurance products to ensure you’re getting the appropriate protection to address your unique needs.

How Critical?  Choosing between critical illness and disability insurance

Critical illness is a product designed to provide income replacement for a serious illness. If you are taken out of the workforce due to contracting a serious illness, then the lump-sum payment (from critical illness insurance benefits) are intended to bridge the gap between a lapse in work income  and when disability benefits kick in. Do you need critical illness?  Well, that depends on your ability to self-insure to cover this gap. This gap could be many months or more.  I guess I see critical illness coming into play in some circumstances but when it comes to disability insurance, this is a must have.

I think disability insurance is a “forgotten insurance”.  I think every working Canadian with any modest debt load (a mortgage, car loans, lines of credit or all three) especially Canadians with dependents should have protection from an unexpected income loss.  The reality is, your ability to earn a living is important and you need disability insurance for those that depend on you on your human capital.  For what it’s worth, we have disability insurance through our employer and I’m very grateful we have it.

Insurance, although not the most sexy financial topic is a very important one nonetheless.  

What’s your take on insurance? Got enough? Need more? Don’t know?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

15 Responses to "Insurance everyone needs to consider"

  1. Excellent article! I found that the most important aspect with insurance is to get connected to the right information. By having the right information, you can be closer to find insurance that truly meets your needs. Information is everything with insurance!

    Reply
  2. I’m a 31 year old professional. I was just told by my mother she took out a life insurance policy on me when I was born and has been paying premiums ever since. I don’t have any kids, and am not worried about money for a house. I’m very tempted to take the cash value and put it in Mawer Balanced fund and watch it sit until retirement.

    If I take the current cash value, is it taxable?

    Thanks,

    Jon

    Reply
    1. Hey Jon, it sure is 🙂 Here is an example:
      http://business.financialpost.com/2012/03/17/insurance-can-be-taxable/

      Unless you really need the money, I would encourage you to think through the CSV (cash surrender value). When a policy is surrendered or ‘cashed in’, there will be an income inclusion for the policyholder equal to the cash surrender value less the ACB (Adjusted Cost Base). This is my understanding. The amount taxable is defined as a ‘policy gain’ and 100% of the policy gain is included in the
      taxable income of the policyholder, for that tax year.

      Best speak to a) a life insurance professional about your situation to confirm and b) potentially an accountant or financial advisor who can provide some suggestions for managing the tax implications of your decision.

      I hope this information helped.

      Reply
  3. I think I’ve read about disability insurance on your site before and I keep thinking that I should look into it, but I never have. My husband is a carpenter so if anything, we would need it just for him, but I’m just reluctant to be overinsured and shelling out hundreds of dollars a month for the ‘just in case’ scenarios.

    Reply
    1. Well, FWIW, I think if you’re self-employed, this is even more reason to have disability insurance since I suspect he’s not covered by any employer-program. We’re lucky to be covered by our employer-program. If you lose your health and your ability to earn an income, it could be devastating. Just my $0.02.

      Reply
  4. Great article! For me term life insurance doesn’t make sense since I don’t have a spouse or dependents. However, disability insurance is very important. If I got sick or injured, I could lose my house without adequate life insurance. Life insurance needs change as you go through life, so make sure you access your insurance needs every few years.

    Reply
  5. Surprisingly, most term products pay the same compensation as whole life insurance products…and in some cases, there are term products that pay a higher compensation.

    Reply
  6. great article. So many companies pushing very high commission whole life policies. Like all financial products u have to do your homework especially with commission hungry life insurance salesman pressuring people into poor products.

    Reply
    1. Thanks AG. I think there are some genuine insurance brokers out there that yes, while they would like to make money from customers, they are looking out for their best interests. People can ID the ‘sales’ pitch pretty quickly.

      Reply

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