Mackay Insurance Blog
5 Tips to Help You Choose the Right Amount of Life Insurance
Buying life insurance is never fun. But it doesn't have to be difficult or even stressful.
In fact, life insurance as a product is actually designed to help ease stress, worry and anxiety in your life.
With the right life insurance policy by your side, you can wake up each day knowing your loved ones will be taken care of financially should you suddenly be unable to provide for their needs.
But getting there can feel daunting, especially when you are trying to figure out which type of life insurance product offers what and how much of it all you actually need.
In this post, we aim to demystify and simplify life insurance step by step so you can select the right policy with ease and confidence.
Step 1: Choose Between Term and Permanent Life Insurance
There are two basic umbrella categories of life insurance: term and permanent.
Term life insurance
Term life insurance is the simpler of the two types of life insurance you can buy here in Canada.
Term life insurance gets its name from how it works: the policy is active for a set term and activates only if the policyholder dies. Once the policy term expires, it is necessary to buy a new term life insurance policy to stay covered, and the premium for the next term will generally be higher.
The one exception is if you purchase a convertible term life insurance policy. In this case, you can convert your policy into a permanent life insurance policy as long as you do so before the term expires.
You should choose term life insurance if:
You have debt and just need to know your family has financial protection in place until the debt is retired.
You have a limited budget for life insurance and need predictable premiums.
You are building an investment portfolio elsewhere.
Permanent life insurance
Permanent life insurance is sometimes also called universal or whole life insurance, although there are some important differences about each.
Essentially, permanent life insurance is a type of policy that is, as its name implies, permanent - it stays with you throughout life and your premium is generally the same for your entire life. It also has a value in addition to the amount it pays out when you die, so it is like a combination life insurance policy and investment.
As such, permanent life insurance is often viewed as both a protective policy and an investment policy.
You should choose permanent life insurance if:
You want to add life insurance to your investment portfolio.
You are able to afford the higher premiums for having a cash value to your policy.
You want to offer your dependents a guaranteed death benefit payout.
You are interested in the tax benefits from holding a life insurance policy.
You want the flexibility to access the equity on your policy in emergencies.
Step 2: Decide How Much Life Insurance You Need to Buy
Because the whole topic of life insurance can feel emotionally charged, it can be good to talk through this step in the decision-making process with your insurance broker.
Having friendly, knowledgeable, objective input can really simplify the planning process.
We like to give our clients this simple 4-step worksheet:
1. How much debt are you carrying?
You may have a car note, a mortgage, student loans, credit card debt or all of the above.
In the event your income suddenly ceases, these creditors will be first in line to gobble up any available resources.
So you definitely want to make sure you purchase sufficient life insurance to cover your debts until they are paid in full.
2. Who is financially dependent on you?
Do you have a spouse? Children? Grandchildren? Elderly parents? Pets?
Consider who among your loved ones may find themselves in sudden financial distress if you were to pass prematurely.
3. What is your monthly net income?
At the very least, you want your life insurance policy to be able to cover your ongoing monthly financial obligations (such as debt) plus replace your monthly net income.
4. What are your dependents' future financial needs?
If you are saving for a child's higher education or have an aging loved one who may need future care, these are examples of financial needs to factor in when choosing your policy amount.
Buy Earlier And Pay Less in Life Insurance Premiums
Like any insurance product, life insurance premium quotes factor in a variety of risk variables.
The major risk variable when it comes to life insurance, however, is, well, death. So it just makes sense that you may well pay lower insurance premiums when you are young.
This can be helpful for budgeting as well as future financial and investment planning.
Other Ways to Save on Life Insurance Costs
You may also be able to trim your premium costs by taking advantage of these cost-saving tips.
Ask your employer about group life insurance (employer-sponsored life insurance).
Opt for term life insurance if premium costs are a real issue.
Choose a shorter term up front.
Use a life insurance broker like Mackay Insurance that can shop around for the best rates on your behalf.
Pay for your premiums once annually instead of monthly or semi-annually.
Ask about preferred rates (these can include non-smokers, health history, etc.).
Buy a stand-alone life insurance policy instead of mortgage life insurance.
Get in Touch
Do you need expert, objective guidance to help you protect your loved ones through the purchase of a life insurance policy? We can help! Just complete this simple online form to get a no-obligation life insurance quote.
Contact us online or give us a call at 888-853-5552.