Do You Need Life Insurance?

Financial planning encompasses a broad range of ideas beyond what I normally blog about - investing. Other tools in financial planning include insurance and wills, two topics I plan to quickly discuss about today. Please note beforehand that my insurance training is limited to college and licensing education. I do not sell insurance and never have, so if you really want to ask about insurance, call your local bank instead.

Life Insurance are common products that financial representatives will try to sell you, and each comes with many different types of features. Products vary country to country, even province to province, and include term, universal, whole-life, etc. But do most people really need life insurance?

Ask yourself this question, "Do I have a dependent?" These include any children, a disabled person, a non-working spouse, parents, or any other person who may rely on your income. If the answer is yes, then you need life insurance. If you take care of no one, then life insurance generally is not required.

If you said yes to the above question, then you should determine how many years of coverage you will need in case you pass away. Although every person's situation will be unique, a general guideline that I was taught was to pay it out until your dependent(s) can survive on their own. For most families, the dependents are their children. Many people may build and plan policies that pay out until their youngest child turns 25, the age when most kids will have finished college and have found a career. It is a good rule of thumb to use, unless you expect your child to remain in post-secondary until much later. You may also consider using a life insurance pay out to cover their costs of education as a way to help them out when you are gone.

The amount of the payout is also an important factor. Many people use their current net income and plan a policy that pays out an equal amount every year for a designated amount of time. For some, if you do not have dependents, you may consider getting a plan that covers a funeral only. Costs can vary, but typically is around $10,000. The good thing about this is that it removes the burden on your family to pay for it, and your assets do not have to be liquidated to cover this cost. This is something I have considered after I left work.

You should also check if your employer has automatically enrolled you into a plan that has a significant pay out. If it does not meet your needs, ask your HR if these can be altered. If not, consider purchasing a second policy with a bank and get all your employer plan documents so they can analyze these as well.

Wills
Since I am on the topic of death, I would also like to note that wills are extremely important. Many people believe that when you die, the government gets all your assets, if you have no will, but this is not true. All provinces in Canada have systems in place that provide automatic transfer of assets to spouses and next to kin. These will be different in every province.

Another good reason to have a will is so that people do not fight over your assets. It's tough to believe but even upon death, family members may still fight over your car, your furniture, etc. Have a will to prevent this from happening.

Make sure the executor of the will, the person who will be taking care of the "janitorial work", is not in the will itself. It is highly suggested to use a lawyer or financial planner, and not a brother, mother, etc. This creates an emotional barrier between the family and the legal document, among other things as well.

Incorporate your life insurance and will. Upon death, you will be required to pay taxes on the market value of your assets. It is impossible to know the value of your assets and the taxable amount, but provide a good sum to the government to cover your taxes so that your assets do not need to be sold, or at least minimizing the damage.

Planning life insurance and preparing a will are daunting tasks. Many have trouble writing up a will because it brings to reality that death is unavoidable, but preparing these two things can help alleviate some of the pain to your family and loved ones after you have left, and that reason alone should be enough for you to take these two things seriously.