Life insurance can be a crucial element in achieving your financial goals beyond just saving and investing.
If you’re working to improve your financial situation, some ideas will come to mind:
- Paying down debt
- Building an emergency fund
- Investing inside a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP)
- Putting your money in other savings vehicles
These are all essential elements of a solid financial plan, but another piece of the puzzle is often overlooked: having life insurance.
People who decide to put life insurance in place typically have looked at their financial situation, often with the help of an advisor, and identified risks that they are uncomfortable with and want to address.
Number 1: To protect your loved ones from financial loss
When a person dies, their family must deal with the financial burden as well as the emotional impact of that loss. Fortunately, life insurance can help protect your loved ones from unnecessary financial hardship and reduce their stress during a difficult time.
It can be a tremendous financial tool no matter your relationship status. Still, life insurance is particularly critical if you have dependents such as a spouse and kids who rely on your income. A young family who carries debt and has children may be concerned with the impact of the loss of one of the parents.
The surviving parent may need money to cover debt or afford ongoing family expenses, such as housing costs, monthly bills, and groceries.
If you are employed by a company that offers a group insurance plan, your needs may be fully or partially covered. Those without employer benefits typically need to seek coverage themselves, and self-employed individuals face specific challenges.
“Business owners often have the highest need to seek out protection on their own, as they are not part of employer sponsored group insurance plans,” Little says. “At the same time, they hesitate to do so as it means they’re going to have to carry the costs of the insurance.”
Even if cash flow is an issue, I recommend business owners speak to an insurance expert to understand what they want to work towards. They may also want to investigate critical illness insurance to protect their livelihood in case they need a health-related leave of absence from the business, he says. “Having some protection in place that injects cash into the business in the event of a health issue may be a wise decision.”
Number 2: To help pay off a mortgage or other debts
If you share the home you own with your partner, children or other loved ones, life insurance can help pay off the balance of your mortgage in the event of your death. It may make it possible for your spouse or family to stay in their current home despite losing their income—something that’s important to many parents.
Life insurance can also help pay off outstanding loans, lines of credit or other consumer debt, funeral costs and burial expenses. Ideally, your policy’s death benefit will be significant enough for your family to maintain their current lifestyle (or at least a similar one) without your income.
Number 3: To transfer wealth to the next generation
Want to leave your kids or grandkids an inheritance? A life insurance policy can be a tax-efficient way of doing that.
“Someone nearing retirement may have no debts, and their children may be grown and no longer dependent, but they have the goal of passing wealth to the next generation, adding that life insurance can help transfer their wealth.
This typically involves purchasing whole-life (permanent) insurance and making your children or grandchildren the beneficiaries. Unlike term life insurance, which only offers coverage for a set period, whole life insurance guarantees an end-of-life payout. The death benefit is non-taxable, so your beneficiaries won’t pay income tax on the money they receive.
Number 4: To make a philanthropic impact
A lesser-known function of life insurance is that it can efficiently transfer funds to a non-profit organization. Some individuals have a particular charity they are very passionate about, and they want to leave a legacy that positively impacts others.
By naming a charity as a beneficiary of your life insurance policy, the money passes tax-free from the insurance company to the charity. And unlike when making a charitable donation through your will, the payment avoids probate and bypasses your estate, so family members or other beneficiaries cannot contest it.
Little suggests asking your financial advisor or insurance provider about options for philanthropic giving. Whether you want to help fund cancer research, support animal welfare and human rights or give back to your alma mater, your life insurance policy can help make it happen.
Number 5: To give you peace of mind
No matter a person’s financial situation, life insurance should offer security and peace of mind. If you’re wondering why and when you should buy life insurance, speak to your financial advisor for personalized advice that reflects your needs, goals and budget.
It’s better to get insured sooner rather than later, according to Little. This will mean you’re covered earlier in life, but your monthly premiums will likely cost significantly less. “Insurance is priced based on age at the time of application,” Little explains. “For this reason, it’s usually advantageous not to put off the conversation.”
Finding the right life insurance
Many people find it challenging to know how much coverage they need for their family. A good advisor can discuss your goals and reverse-engineer the numbers to find the right policy. Just ensure you’re dealing with a reputable professional who listens and will help you understand your options.
There are many reasons to buy life insurance, but no matter what motivates your decision, it will feel good to know you’ve protected what’s most important to you.
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