Insurance Basics 101

 In Estate Planning, Insurance, Retirement Planning

Financially, people have a lot on their plates, from paying off debt, growing RRSP’s, managing day-to-day expenses to buying houses for their growing families.

So it’s not surprising that they may be forgetting something else: life insurance.

Why Should I Get Life Insurance? 

For many of us, life insurance never crosses our mind until we go through some kind of life-changing event. It is not until some important event in our lives takes place, such as getting married, buying a house, having kids, or taking care of our loved ones when we age that we start thinking more about our obligations, responsibilities and priorities.

Provide for your Dependents

Let’s start with the most obvious reason for why someone should invest in life insurance … the fact that it can replace your income if you die before your dependents. You may want your family to enjoy a certain kind of lifestyle, your children to go to university or college. Likely, you still want this to happen even if you pass prematurely. Your family, may not be able to afford it if you pass and do not have enough savings to cover their debt and expenses. You can address those concerns by buying enough life insurance.

Other reasons o have life Insurance:

  • To cover taxes at death on illiquid assets
  • To pay off debts
  • to cover final expenses like funeral expenses, lawyer and executor fees
  • To help business and corporation arrangements remain viable
  • To leave a Legacy

This list is not exhaustive but does represent some key uses of life insurance in the estate planning process.

What is Life Insurance

A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death.

When you purchase a life insurance policy, you determine the amount of your life insurance policy and the type of policy you purchase. Keep in mind that there are many different types of life insurance available. When purchasing life insurance, there are many things to consider: the type of policy you are purchasing, the amount the policy is for, and perhaps most importantly, how much life insurance you actually need.

Typically, life insurance is chosen based on the needs and goals of the owner. There are many varieties of life insurance. Some of the more common types are Term Life insurance and Permanent Insurance.  Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It’s important to note that death benefits from all types of life insurance are generally income tax-free.

When Do You Need To Buy Life Insurance?

Simply put, you need life insurance if someone else is depending on your income. Usually, this means your children, but it could also be used to pay off debt for your spouse or parents. Although age may play a role in how much life insurance you need, the decision to buy life insurance has nothing to do with age.

How cost is determined

Insurers use rate classes, or risk-related categories, to determine your premium payments; these categories don’t, however, affect the length or amount of coverage.

Your rate class is determined by a number of factors, including overall health, family medical history and your lifestyle. Tobacco use, for example, would increase risk and, therefore cause your premium payment to be higher than that of someone who doesn’t use tobacco.

The Bottom Line

Life insurance is not for everyone. But, you should not dismiss it without doing some research. If you have others who depend on you financially, it is very likely that you need it. Your financial advisor can help you to decide which type of policy is best for you. Buying life insurance can be one of the best financial steps that you take for you and your family

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