Protecting Your Family's Future
By: Terri Williams CFP
My friend's husband recently passed away - very suddenly. She has been left with shock, sorrow and sadness. And with very little life insurance on her husband's life, she has also been left with a financial nightmare.
While no one wants to think about their own death, when tragedy strikes someone you know, it triggers you to look at your own life situation. What would happen to your family if you suddenly died? How well would your family cope financially without you? It is important to have enough life insurance to ensure financial stability for your family, both short-term and long-term.
There are three main purposes for life insurance.
- To pay your immediate costs and debts. This would include your funeral and final legal costs, which could be $10,000 - $15,000 or higher, plus any debts including your mortgage, credit card balances, car loans, lines of credit and a 3-6 month emergency fund. You also include in this calculation lump sums for your children's college or university costs, a retirement fund for your spouse, and any money you may want to leave to charity. You should also consider any business needs for insurance as an immediate need.
- To replace your income. No matter if you are the main income earner or a homemaker, it is important to realize your spouse will need to have a lump sum that can be used to generate an income to replace your pay cheque or replace the important services you perform in the home.
- Estate and retirement planning. There are two things certain in life - death and taxes. Insurance can protect your estate from the taxman, who will be knocking on the door for his last tax grab when you die.
But choosing life insurance can be very confusing. The type of life insurance you should be considering depends on your needs.
Term: Immediate costs and replacing your income are typically short-term needs (except hopefully your funeral costs). Term is meant for "if you die" scenarios and is the cheapest form of protection. You typically buy it for 5-, 10- or 25-year terms and during those years, you pay a monthly set price (called a premium) that never changes. If you die, the person you name as the beneficiary of the insurance receives the amount of money you are insured for. The price you pay is based on your health and your age. The younger you are, the cheaper the insurance will be. Typically, people with short-term needs who are watching their budgets, buy term insurance.
Permanent: Permanent insurance is meant for longer term "when you die" scenarios. It will pay out on your death, no matter when that occurs. Premiums can be substantially higher than term life insurance. But although you are covered for life, you don't necessarily pay premiums for life. There are a number of ways cash can flow into your policy to help you pay for your premiums. There are two main types of permanent insurance.
Whole Life: With whole life, you pay a fixed price for a certain amount of coverage to be paid upon your death. These policies are very flexible - you can pay off the cost of insurance faster or slower depending on your financial situation. Part of the premium builds up a cash value that you get back if you cancel your policy. Or you can access the money by taking out a loan against the cash value. Some whole life policies have dividends paid to them from the insurance company, which also increases the savings and can be used to pay premiums.
Universal life: This type of insurance is similar to whole life except that you can decide where the cash value portion is invested and you have more access to your savings. The profit generated by your savings is tax-free until you remove it from your account. Universal Life is often used to tax-efficiently save for retirement once Registered Retirement Savings Plans (RRSPs) are topped up.
No matter what type of insurance works for your situation, it is important to speak with an insurance expert to ensure that your family, and your hard-earned savings, are protected in the event of an untimely demise.
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