Looking to purchase life insurance for the very first time? While the topic of life insurance might appear confusing, that doesn’t always have to be the case – instead, here are seven tips to help you out as a first-time policy buyer.
1. Figure out whether you really need life insurance
While it’s usually better to be safe than sorry, not everyone needs life insurance. Like creating a will, binding a life insurance policy means you’re financially securing your loved ones' futures in the unfortunate event of your passing. But this also means that if you don’t have any financial dependents – or a substantial amount of debt that could be passed on – you probably don’t need coverage.
If you do have dependents, such as a partner, spouse, or children, it may be time to consider shopping around for a policy. Life insurance can be used for a number of items after you die, including:
- Paying off the mortgage on the family home
- Funding your child’s post-secondary education
- Replacing your income for regular purchases (e.g. groceries, rent, utilities)
2. Choose between term life and permanent life insurance
After you’ve confirmed the need for coverage, it’s time to figure out what type of coverage you need: term life or permanent life.
Term life insurance
Term life insurance covers you for a set term, such as five, ten, or thirty years. During this time, if you pass away, your insurer will pay out the agreed-upon death benefit to your beneficiaries. If you’re nearing the end of your term, you can typically also renew the policy for another term or convert it into permanent life insurance.
Because term policies aren’t guaranteed to pay out, premiums tend to be much cheaper than that of a permanent policy. It’s a good option if you only need coverage for temporary financial situations, such as paying off a mortgage or putting your kids through college.
Permanent life insurance
The most popular form of permanent life insurance is whole life insurance – and this policy is exactly what it sounds like: coverage for the entire duration of your life. Unlike term life insurance, whole life policies don’t expire but rather payout when you do eventually pass away.
Whole life policies typically also come with a built-in cash value, a growing fund that you can pull out of if you need some extra money on hand. However, be aware that there are often consequences to withdrawing the funds – it won’t be tax-free, and you could be reducing your beneficiaries’ future death benefit.
It’s no surprise that permanent life insurance costs more than term life insurance, and because many people don’t need coverage for their entire lifetime, term life tends to be the more popular option. However, it can still be a useful product for some special circumstances, such as estate planning.
3. Make sure you aren’t underinsured (or overinsured)
Choosing your death benefit is a large part of the life insurance buying process – essentially, this is the amount of money your beneficiaries will receive after you die. And the higher you set the death benefit, the more you’ll be paying to keep your policy active.
While there isn’t one ideal amount of coverage you should purchase, one way to calculate your policy’s death benefit is to use the DIME method – also known as adding up the following:
- Debts – How much debt are you carrying? Don’t include your mortgage debt here, but do include future debts, such as funeral expenses.
- Income – How much do you make each year? How many more years will your beneficiaries be relying on your income? Multiply these two numbers to get the total.
- Mortgage – How much of the mortgage is left to pay off? You’ll probably want to include the entire amount here, so your dependents can pay off the home worry-free.
- Education – How much will it cost to put your children through school? Consider the types of programs they’ll want to pursue and whether they’ll be living at home.
Although this method may not be for everyone, it can still give you a rough idea of how much life insurance you should be purchasing. You can also manually calculate this amount by adding up each and every one of your financial obligations while subtracting the money that’ll already be available upon your death (e.g. investments, partner’s salary).
4. Understand how your life insurance premium is calculated
Aside from the type of policy you choose – as well as the amount of coverage you purchase – there are two main factors that impact your life insurance premium: age and health.
The younger and healthier you are, the less expensive your life insurance will be. It’s no surprise that a lower risk of death brings cheaper premiums, and knowing this, you may want to apply for a policy sooner than later.
In most cases, your premium will be locked in for the entire length of your policy. If you have a term life plan that you later want to renew or convert into whole life, your premium will be re-calculated based on your new age. On the plus side, you typically aren’t required to requalify with a medical exam – which is especially ideal if your health has deteriorated during the term.
If you have a pre-existing condition, you may be denied a conventional life insurance policy. But that doesn’t mean you won’t be able to get any coverage. There are a few options you can still consider, including guaranteed life insurance. This type of no-medical life insurance doesn’t require a health exam and as the name implied, guarantees you’ll be insured – but don’t expect the premiums to be cheap.
5. Consider insuring your health
While most people recognize the need for a life insurance policy, the need for complementary products, such as disability and critical illness insurance, is often forgotten.
- Disability insurance – This type of coverage provides income replacement in the event you’re unable to work due to an accident or unexpected illness for a specific period.
- Critical illness insurance – This type of coverage provides a lump-sum payment in the event you develop a life-altering disease (e.g. cancer, stroke), specified in your policy.
6. Answer all questions truthfully
When applying for your life insurance policy, you may be asked a long list of questions regarding not only your age and health but also your lifestyle – including your smoking status, occupation, and hobbies.
While it may be tempting to tell a lie to lower your premium, it’s never a good idea to do so when it comes to insurance. Aside from the fact that you’ll probably need to complete a health exam, life insurance providers may also verify the information you provide by looking at third-party sources, such as your medical history.
Insurers can deny claims based on untruthful applications, and you wouldn’t want your beneficiaries to lose their death benefit, right when they need it the most.
7. Don’t settle, shop the market
Last but not least, you shouldn’t settle with the first insurance company that accepts your application. Rates can differ greatly from one insurance company to another, and you won’t know which one offers the cheapest premium until you shop the market.
With Ratehub.ca, you can compare life insurance quotes from over 20 of Canada’s top providers online. That way, you won’t be going through the hassle of visiting multiple brokerages and insurers – filling in application after application – in order to find the one that suits your needs for the best rate possible.
The bottom line
With these seven tips, you’ll be equipped with the right knowledge to bind your very first life insurance policy – although end-of-life planning can feel overwhelming, it doesn’t have to be a difficult process. If you’re looking for more information on the buying process, be sure to connect with a licensed life insurance broker in Canada today.