Why Do You Need Life Insurance?
True or false: Life insurance is about financially benefitting from somebody’s death. If your gut reaction is to say “true,” you’re not alone. Life insurance is probably one of the most misunderstood products out there. But for the record, the answer is a great big resounding FALSE.
If you’ve ever wondered, “Why do you need life insurance if not to get rich?”, keep reading for nine very important reasons.
But first, let’s dispel the ‘get rich quick’ myth. The fact is, there are rules around how much life insurance coverage you can get, so using it as a ‘get rich’ scheme really isn’t realistic. Here’s why: Just say Bob applies for $5 million in coverage, but he has an annual household income of $50,000 and very few assets to his name. In this case, his application would be denied. The most an insurance organization is going to let Bob consider is 10x his salary + the value of his assets1 (e.g., home, investments, etc.). This is how life insurers keep those with ulterior motives from taking advantage.
So why do you need life insurance?
1. Income replacement
If you live in a two-income household, life insurance can be your loved one’s safety net during a time in history where salaries aren’t keeping up with inflation, young adults can barely afford a down payment for a house (or their mortgage), and everyone is a bit more risk averse when it comes to their finances in general.
The last thing you want in the current economic climate is to leave your family to fend for themselves in the event of your untimely death. We are seeing more and more heartbreaking crowdfunding campaigns triggered by the death of a spouse. No mourning family should have to deal with this sort of financial stress on top of losing a loved one.
(Psst! Single moms need life insurance too. Here’s why…)
2. Homeownership
If you’re a homeowner with a family, you might be wondering, Why do you need life insurance? Here’s why: If you have a mortgage that will take 25+ years plus to pay off, a term-30 life insurance policy can save your partner and children from having to sell the family home if you depend on two incomes to make the payments. And how many people can afford a home on a single salary these days? Very few. #thanksinflation
3. Debt
In addition to your mortgage payments, you may have other outstanding debt – like student loans, unpaid credit cards, or other money owing. If you were to pass away before these debts were paid off, your next of kin would be left to pay the balance. Having a life insurance policy in place means your family would receive a lump sum payout to cover any unfinished business, meaning they wouldn’t have to go into debt… to pay yours off!
Want to ensure your adult kids aren’t left with any debt? Couples Insurance will pay out after both you and your spouse have passed.
4. Small business
Have your own business? Life insurance can come in handy in more than one way. For example, term life insurance can pay off a business loan or help your partner cover the costs of running a business solo. Another example is Business Partners Insurance, which can provide a payout to the next generation after you’ve both passed – to help the business you worked so hard to build live on well beyond your lifetime.
5. Kids
Why do you need life insurance if you have children? Well, losing a parent can mean big, traumatic change for little ones. But getting term 20 life insurance for yourself can cover their dependent years and help ensure everything else in their life remains consistent. For example, not having to downsize means your children can stay in the home they love, the neighborhood they know, and the school where all their friends go. And if your spouse doesn’t have to worry about childcare costs, they won’t have to worry about the logistics of keeping their job.
6. An ‘outside of the bank’ investment option
Speaking of children, a whole life insurance policy for a child can nicely complement an RESP, acting like an investment they can dip into2 in the future to pay for tuition. But unlike an RESP, your kids can choose to use the money for whatever they choose, like a car, a trip, or a wedding – because your child won’t be penalized financially if they use it to pay for something other than their education.
Once they’re all grown up, that investment portion could even be accessed to help your child pay for a future down payment on a home. And the way things are going, it looks like our kids will need all the help they can get!
7. Second property
If you were kind enough to leave your kids the family cottage in your will, don’t forget that your “gift” will come with some hefty taxes upon inheritance. It’s critical you consider capital gains tax when leaving behind a second property – especially because the amount owing can be so high that your kids may have no other choice but to sell. If you want to keep the family cottage in the family, purchasing life insurance to offset the tax is the best decision you can make. This article, How to Offset Capital Gains Tax on Real Estate in Canada, walks you through the different life insurance options to consider.
8. Final expenses
Final expenses typically include legal and probate fees, taxes upon death, as well as funeral and burial or cremation costs. And funerals alone can cost an average of $9,150 and even as high as $20,000 in Canada these days (source). If you’d rather your grieving loved ones not have to pay for these expenses out of pocket, that’s a pretty good reason to purchase life insurance. Learn more in this article: Do I Need Funeral Insurance in Canada?
9. Legacy
While the primary job of life insurance is to protect your loved ones, it also has the power to become a meaningful gift and a generous addition to your legacy. If you are a socially minded individual who feels strongly about giving back to your community, this may be yet another reason to buy life insurance. Donating life insurance benefits is as simple as naming a charity you support as a beneficiary (i.e., the person(s) you choose to receive your life insurance payment in the event of your death) on your life insurance policy. And there may be some tax incentives to reward your generosity!
A way to show loved ones you care
Here’s a bonus reason: Buying life insurance is another way to show your spouse or partner how much you love them. While the stressors of everyday life – parenting, bills, inflation – can sometimes get in the way of those lovely little romantic gestures, there are other, more practical ways to show we care. And getting life insurance to protect your family’s financial future is a biggie.
So, why do you need life insurance? Remember that life insurance isn’t about your loved ones getting rich off your death. It’s simply about them having enough money to pay off debt, afford their living expenses, and continue to live the life you had imagined for your family. And this may be the most important reason of all.
Let us help
Now that you know the many reasons why life insurance is a critical piece of financial protection, let us help you find the right product for you and your loved ones. Book a no-obligation call with a Serenia Life advisor to ask questions or get a free quote!
Disclaimers
1While this applies in some cases, it can vary by insurer and policy type.
2Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the cash value of the policy will reduce the available cash surrender value and death benefit.
