A well-constructed investment portfolio is a key element of your financial plan. However, without the proper protection, your plan could be derailed by unfortunate and unforeseen life events. We’ve received many questions about risk management products such as life insurance, which can play a critical role in protecting you and your family against the unknown. Let’s take a look at our top 5 life insurance questions and answers.
1. How much life insurance do I need?
Like so many other things, that depends on your own unique personal circumstances, and the reasons you require insurance. The best way to determine the amount that’s appropriate for you is to complete an insurance needs analysis, which typically considers items such as funeral and final expenses, taxes owing upon death, mortgage and other debts, kids and related needs (such as education savings), and providing for spouse or loved ones. In the meantime, the Government of Canada, through the Financial Consumer Agency of Canada (FCAC), suggests a ballpark estimate of an amount equal to 7 to 10 times your annual salary in order to protect your family, and offers a worksheet to help you determine how much insurance you should have.
2. I have life insurance through my plan at work – is that good enough?
Group life insurance has some attractive benefits. It is generally easy to obtain, and the process is simple – typically just a matter of answering a few questions on a form, as the medical testing that is often required for individual life insurance policies is not required for enrolment in group insurance plans. It’s also relatively cheap, especially if you’re older and not in great health. Note that the converse is also true, and price can also be somewhat of a disadvantage for young and healthy individuals who end up paying the same rates as those who are unhealthy and higher risk.
However, the coverage offered through group plans is often inadequate and insufficient, as most group life insurance plans offer only a basic amount of coverage, typically 2 times your salary. While most group plans allow the employee to pay additional premiums in order to increase the coverage up to a limit (such as a maximum of 5 times salary), this amount may be sufficient for some, but for many others, it is not. Another key disadvantage of group life insurance is that it’s tied to the job – if you leave the job, you lose the insurance. This poses a very significant risk, especially if your next employer does not offer a group life insurance plan. Finally, group life insurance is not guaranteed – the premiums are not guaranteed and can be increased at any time, or the coverage could be cancelled altogether, as the employer can simply decide to cancel the coverage at any time, which would then leave you uninsured.
3. Do I have to get medical testing?
Sometimes. Depending on the individual applying for insurance, and the amount of insurance being applied for, there may be various levels of medical information required. If you’re young, healthy, and applying for only a small amount of insurance (for example, less than $250,000) there is often no medical testing, and a simple questionnaire is all that is required. On the other hand, if you’re older, in poor health, and requesting a large amount of life insurance, there may be extensive medical testing involved. Of course, this makes perfect sense, as insurance companies need to properly assess the risk which they are insuring. In the meantime, the most common requirement is a medical questionnaire, and a paramedical.
During a paramedical exam, a medical examiner asks questions similar to those on the insurance application, to gain a better understanding of the applicant’s medical history. The examiner will measure such things as your height, weight, blood pressure readings and pulse. A urine sample from the client, which is then tested for sugar, protein and blood content. A blood sample may also be required, again depending on the applicant and the amount of insurance being requested. Insurance companies hire 3rd party medical companies to complete this process, which normally takes less than half an hour, is conducted in the convenience of your home, and costs you nothing.
4. How much does it cost?
It depends. Although there is some price variation from one company to the next, the life insurance marketplace is highly competitive, and prices are often very similar, if not the same. Rather, the cost of an insurance policy depends mostly on these factors:
- Age – The younger you are, the cheaper it is to purchase life insurance. Conversely, life insurance becomes more expensive with age.
- Health – Applicants in great health can enjoy “preferred” or “preferential” rates, whereas those in poor health will incur higher premiums.
- Smoker status – Smokers pay much higher insurance premiums, often as much as 2 or 3 times as much as an equivalent non-smoker would pay for the same policy. Here’s one more reason to quit!
- Gender – Males pay more than females. The reality is that, on average, females have a longer life expectancy than males, and therefore females enjoy lower life insurance premiums.
- Amount of insurance – in general, the higher the amount of insurance, the higher the premium.
- Type of insurance – Term policies are cheaper than permanent policies, and the shorter the term, the lower the premium. For example, a 20 year term policy would typically be cheaper than a permanent policy, and a 10 year term policy would be even cheaper again.
5. Is it tax-free?
Yes. In Canada, the proceeds of a life insurance policy, known as the death benefit, is paid tax-free to the named beneficiary. This includes all types of life insurance, such as term, permanent, and group policies through employer benefits plans. However, in the absence of a named beneficiary, the life insurance proceeds are typically paid to the deceased’s estate. While that payment is still tax-free, it may be subject to probate fees (EAT – Estate Administration Tax, in Ontario). Probate is the process by which a court confirms that a will is valid, and this process involves fees known as probate fees. One of the best ways to minimize probate is to ensure that you name a beneficiary on any and all life insurance policies. (Note that the same is true for RRSPs, RRIFs, other registered accounts.) With a named beneficiary on the policy (or plan), the assets stay outside the estate, and are paid directly to the named beneficiary, therefore avoiding probate.
Bottom Line – Life Insurance Questions
Just like car insurance, life insurance is one of those things you hope you never need to use. We all hope that everything in life works out as planned. However, a financial plan isn’t really much of a plan at all if it can be easily derailed. Insurance helps keep your plan on track, and protect you against the many “what if” scenarios that could otherwise threaten the financial stability of you and your family.