Why take out life insurance?

17 January 2023 by National Bank
Young mother giving a hug to her child.

Life insurance can help protect your loved ones and your assets in the event of your death. It also provides the peace of mind that comes from being prepared. Here’s an overview of what you need to know to make informed choices about life insurance.

What is life insurance?

The main purpose of life insurance is to provide financial security for your loved ones in the event of your death. If you die, your chosen coverage amount is paid to the people of your choice (the beneficiaries).

This money is not taxable. If your life insurance contract stipulates that your beneficiaries are to receive $100,000, they will receive $100,000.

Types of life insurance

There are various types of life insurance. The two main types are:

Term life insurance

Term life insurance covers you for a set period of time, e.g., 10 years. It’s often cheaper than permanent life insurance. But when the term is up, you’ll either need to renew it (often with higher premiums) or cancel it. 

Permanent life insurance

Permanent life insurance covers you for your entire life, as long as you keep paying your premiums. It doesn’t expire. As a general rule, the premiums (your payments) will not increase.

There are also different types of permanent life insurance, including universal life insurance, which combines savings and insurance. You can choose different types of investments, and you can either withdraw the money accumulated or use it to pay your premiums. This type of insurance may be part of your financial plan.

It’s also possible to combine term and permanent life insurance to benefit from coverage that’s tailored to your specific needs.

Did you know? It’s generally mandatory to sign up for the group life insurance offered by your employer. This is usually term life insurance and remains in effect as long as you are an employee. Make sure that the insurance amount meets your needs. If it doesn’t, think about increasing it or taking out additional life insurance.

When should you buy life insurance?

You can take out life insurance at any age. The right time for you is likely to be determined by important events in your life.

Example: The arrival of a child may lead parents to take out life insurance to help meet the child’s financial needs if something happens to them.

Buying a home is also a good time to revisit your insurance needs. In this case, you may also opt to insure your mortgage loan or line of credit. Loan insurance protects your ability to repay your debt.

Expert tip: When a major life event occurs, take the time to think about your insurance needs. For example:

In all of these cases, the aim is to provide peace of mind. Check out our page about the different types of insurance.

When naming beneficiaries, you can choose to make them revocable or irrevocable.

The insured can change a revocable beneficiary at any time, without notice. An irrevocable beneficiary, on the other hand, will remain on the insurance contract unless they give their written permission to be removed.

How much does life insurance cost?

How much you pay for life insurance depends on a number of factors. These include:

  • Your age
  • Your occupation
  • Your health 
  • Your lifestyle
  • Etc.

All these elements will have an impact on your insurability and, as a result, on the premium you pay.

Top tip when you’re shopping around for life insurance

Don’t just look for the cheapest premium. Make sure you pay close attention to the coverage offered too. Be clear on your reasons for buying life insurance and choose the coverage that’s best suited to your situation.

What are the benefits of life insurance?

Protecting your loved ones and your assets in the event of your death

The main objective of life insurance is to provide a certain amount of money to your beneficiaries in the event of your death.

The money can be used to pay off your mortgage or to protect your loved ones’ financial health.

Safeguarding the future of your business

If you own a business, you might want to protect your partners and employees through a life insurance policy held by your business.

In the event of your death, this would provide a lump sum payment to your partners, which they could use to settle debts, pay general expenses or buy your share of the business from your estate.

If you’re a business owner, creating a family trust may also offer certain benefits, like reducing the taxes payable at death.

Making a gift to charity

You can take out a life insurance policy to ensure that a charitable organization receives the insured amount and avoid the gift being challenged. 

In the case of an immediate gift, the insured may benefit from tax relief.

Keep in mind

Not everyone needs to take out life insurance. For example, someone who doesn’t have dependent children, rents their home, is a student and doesn’t have significant savings may not need it.

While life insurance can be used to pay funeral expenses and any taxes or debts owing after your death, it’s also possible to use other assets to cover these costs. It’s important to discuss these matters with an expert before you buy life insurance.

How much life insurance do you need?

The amount of life insurance needed differs from one person to another. The amount chosen should make up the difference between your heirs’ income and their expenses.

To estimate how much life insurance you need, ask yourself these questions:

  • Do you have debts for credit cards, personal loans, etc.?
  • Do you have a mortgage? 
  • Will your death lead to new expenses, such as childcare costs? 
  • What will your heirs’ income be? 
  • How long will your heirs require financial support?
  • Will the insurance benefit be needed to cover expenses related to your death, such as funeral costs, legal fees, estate executor fees or taxes?

Life insurance can give you the peace of mind that comes from knowing your loved ones and assets will be protected. Take the time to shop around and talk to a specialist!

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