Why is Life Insurance so important for most people?
Life insurance is one of those things that everyone seems to have an opinion on. In my thirty years of being in this business I have heard all kinds of arguments and theories that are in favor and against. The justifications often vary from the sublime to the ridiculous. The reality is we make choices in life that are pivotal to our well-being and often we may not know the consequences of those choices in the short mid or long term.
I look at Life insurance as the great equalizer, a simple product that, when triggered, can have a huge impact on those that are left behind. I am yet to meet a widow who complained about receiving a check from an insurance company. I have often heard, “I wish he had more”, or “is that all there was, there is nothing else? What are we going to do?” I often think about situations whereby people didn’t want coverage or delayed their decision making process and subsequently pass away unexpectedly of a sudden illness. The question I always ask is why? How could this happen? Perhaps I did not try hard enough. I often think about a situation years ago where a client had a small family and only 250k of coverage. I called him time after time and he would always put me off. I have no time, I’m too busy at work, call me next week. It would have been so simple to add another 250k. How much time would it have taken out of his busy schedule? He certainly could afford the coverage. These are hard lessons to learn as a sales person but devastating to those left behind.
Life insurance lets you live your life unencumbered. It takes care of the uncertainties. It is your fallback position. As long as you pay the premium it is guaranteed to pay out within the specified parameters you choose. For many hard-working Canadians, it is increasingly more difficult to save and low interest rates offer a tantalizing choice to add on more debt. By having life insurance, all is forgiven at death. Life insurance is remarkably affordable especially for those that are looking to protect their families and loved ones in the formative years. The simplest term insurance is priced within everyone’s reach providing they are healthy.
Life insurance can be broken down into two simple categories. Term insurance, and permanent insurance. Term insurance is very simple to understand and is straightforward. You pay a fixed premium for a predetermined number of years. This is your guarantee. The most common term insurance plans are ten term and twenty year term. We are also seeing more thirty year terms as well. I often advise clients not to predetermine the term period until the insurance company provides them with a rate. Within the scope of term insurance there are generally three classifications of rates which are determined by various factors including health and lifestyle. My general rule of thumb is the better the rate classification, the longer you should go providing your budget permits it. Permanent insurance is a whole other complexity that includes product names you likely have heard before like Whole life, Universal life, and Term to 100. The product variation and design is vast and one must use extreme caution when selecting one of these products. They are typically presented with spreadsheets with a myriad of columns whose purpose may be difficult to understand. In another article I will attempt to explain some of the finer details of these products. Suffice it to say that they are not all created equally and choosing the wrong product for the wrong reasons can wreak havoc on your financial plan. Generally speaking the returns on most of these products are not guaranteed, and the performance can vary sharply from the spreadsheet. Which product is most suitable and under what circumstances is not always easy to ascertain.
One thing I try to impress upon clients is that Life insurance is a moving target and that people’s needs will vary and change throughout their lives. It is important to pay close attention to the decisions you make as you would with other investment classes.
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