Spoiler alert: the answer is yes! Life insurance plays a crucial role in your financial security and is a loving gift for your family if something unexpected happens. It can cover everything from funeral expenses to debts and even protect your loved ones from future financial burdens.
At Latutu Financial Services, we believe life insurance isn’t just about protection—it’s about ensuring that your legacy lives on, giving you and your family peace of mind.
How Does Life Insurance Work?
Think of life insurance as an agreement where you pay regular premiums, and in return, the insurance company guarantees a lump sum payment (the death benefit) to your chosen beneficiaries when you pass away. This money helps take care of things like funeral costs, any outstanding debts, or simply giving your loved ones financial security.
Basic Life Insurance Terminology
- Policy: This is the contract between you and the insurance company. You can even buy policies for your loved ones.
- Policyholder: You are the policyholder, meaning you own the policy and manage it.
- Premiums: These are the regular payments you make to maintain your policy, which can be monthly, quarterly, or yearly.
- Beneficiary: The person or people who will receive your death benefit. Fun fact: your beneficiary doesn’t always have to be a person! In 2010, a woman left her Chihuahua, Conchita, a whopping $11.3 million!
And if you’re an accountant worried about taxes—don’t sweat it. In Canada, your beneficiary doesn’t have to report life insurance as taxable income.
Types of Life Insurance
There are two main types: Term Life Insurance and Permanent Life Insurance.
Term Life Insurance: Simple, Affordable Coverage
Term life insurance covers you for a specific period, usually between 10 to 30 years. For example, if you get a 20-year term policy, your beneficiaries will receive the payout if you pass away within those 20 years.
- Cost of Term Life Insurance: Term insurance is often compared to the price of a large pizza every month. A young, healthy person can get $100,000 coverage for an affordable price. However, the older you are when you sign up, the higher the premium. So, it’s best to lock in lower rates while you’re young!
Term insurance is a great option if you only need coverage for a certain period, such as until your mortgage is paid off or until your kids are financially independent. Plus, most term policies can be converted into permanent ones without needing another medical exam.
What Happens When Term Insurance Expires?
If your term insurance expires but you still need coverage, that’s where Permanent Life Insurance comes in!
Permanent Life Insurance: Lifelong Coverage
Permanent life insurance covers you for your entire life and builds cash value over time. While it may be more expensive upfront, the premiums are locked in and provide peace of mind for the long haul.
In comparison to a term plan, permanent insurance is like buying 10 pizzas … but the payout is guaranteed as long as you’re alive. There’s also no risk of outliving your coverage.
There are two main types of permanent insurance: Whole Life Insurance and Universal Life Insurance.
Whole Life Insurance: Protection + Investment
Whole life insurance not only provides coverage but also includes an investment component that grows tax-free. You can even share in the company’s profits through dividends, which can be used to lower your premiums or increase your death benefit.
Universal Life Insurance: Flexibility for Investors
Universal life insurance gives you more control, allowing you to adjust your premiums and invest within the policy according to your goals. It’s a popular choice for wealthier Canadians who’ve maxed out their TFSAs and RRSPs, as it offers additional tax-sheltered investment space.
How Much Life Insurance Do You Need?
At Latutu Financial Services, we recommend a coverage amount that is 7-10 times your annual salary. For example, if you earn $100,000 per year, you might aim for $1 million in life insurance coverage. This ensures your family can maintain their quality of life if something happens to you.
Additionally, all your insurance premiums combined should be no more than 10% of your income—this is a smart way to use a small portion of your resources to protect the rest!
If you’d like a personalized consultation to determine the best plan for your needs, Latutu Financial Services is here to help! Contact us for a complimentary review of your options.
Feel free to subscribe to our YouTube channel for more tips on growing and protecting your wealth in Canada!