BY: FAZAAD BACCHUS
Too many times I have seen clients who have purchased their insurances without understanding why they have bought it as well as what the policy really is all about. It is not enough to just buy a life insurance policy; you must buy the right type and the right amount. Should you buy a term policy or a permanent policy, well that depends on what your needs are, and here lies the dilemma. Have you done a Financial Needs Analysis prior to your purchase?
A prime example is someone who buys a mortgage protection policy from a bank. It covers the need where the mortgage may be cancelled in the event of the death of one of the insured, but is that the right type of policy or are you better off buying a mortgage cancellation from an insurance company? The latter might more suit your needs, especially if you want to keep the coverage after you have paid off the house. In addition, it’s a guaranteed policy with upfront underwriting so you are sure that your beneficiary will receive payments.
If the mortgage insurance is the only one that you have, is it enough if you have children who are still young and are dependent on you for their livelihood? Most likely the answer is no, Financial Needs Analysis requires taking family income loss after the death of a major breadwinner to ensure that the family does not suffer a loss of income. The mortgage may be paid off, but the children will still need food on the table, clothes to wear and some form of recreational money.
If you bought a term policy, it will expire at some time and there is no cash value at the end of the life of the policy, could you be better off if you bought a permanent policy? And what if you cannot afford the permanent premiums in the future; will there be cash values to carry the policy in a time of distress? There are some permanent policies where you can pay them off in as little as ten years. Some you have to pay for all your life and some pay for a limited time, some that have investment growth and some guaranteed growth, which to buy is not an easy decision.
Should you require a policy that pays upon the first to die or maybe it is better to buy a last to die policy. Both are valid but one is more appropriate depending on your needs. If you need it for a mortgage, definitely it’s a first to die but if you need it for RRSP taxes pay off and the money has been rolled over to a spouse, you may want to consider a last to die. There are many uses for life insurance, if you have capital property that you need to pay capital gains tax on before passing on to your children, you can use a life insurance policy to pay off the tax. You may also use your insurance to leave a legacy to your church or favourite charity and don’t forget about your grandkids.
However, to effectively plan all of these you should have a Financial Needs Analysis done.