In the children’s story of Goldilocks and the Three Bears, she had to try out each of the beds to find the right fit for naptime. The same can be said for life insurance, you need to find the right one that fits you and your lifestyle.
And just like Goldilocks, you have three options available:
1. Permanent Life Insurance
2. Term Life Insurance
3. Group Life Insurance
Before we delve into those choices, it’s interesting to note that 61% of Canadians hold some form of life insurance – that’s according to a recent study by the Life Insurance and Market Research Association (LIMRA). There were a couple of other surprising findings, 38% own an individual life insurance contract, which means almost 40% of Canadians are relying on their employer for life insurance through their benefits.
This is not good.
* The amount is most likely not enough to pay off your mortgage and/or provide income for your spouse and family.
* No job, no life insurance – if you quit, retire, get laid off or fired, there goes your benefits! If there is an option to convert your group insurance to an individual plan, usually it’s expensive or has a lot of restrictions.
So, what role should group life insurance play in your financial planning? It’s important to look at all three types of insurance first so that you can draw a comparison. Individual life insurance comes in two forms: term life insurance, which expires at a certain age and entire permanent life insurance, which provides protection for your lifespan and can also build savings – this is also known as Universal or Whole Life. Here is a breakdown of the three options:
* Permanent life insurance (you own it): by paying premiums annually you build equity and it eventually becomes fully paid or self-supporting. Bonus: you can use your equity to borrow from, just like the equity in your home.
* Term life insurance (you rent it): Like renting an apartment, this type of insurance has a renewal date and tends to go up at the end of the period. It usually lasts for ten, twenty years or sometimes longer. But just like renting, at the end of it all, you have no equity, once it expires, that’s it.
* Group life insurance (you are ‘borrowing’ it): This is the insurance from your employer and that’s who has the contract with the insurance company – not you! That means the employer and the insurance company can cancel the entire benefit plan at any time. They are in fact, lending you the coverage.
How do you decide which is the right fit for you? What you want to make sure is that you have a foundation that will provide protection for life at a fixed cost and create equity for future borrowing.
Here’s the trick: place lower cost term insurance when expenses are high. This is a wise move for those with debts, children and outstanding mortgages. One other bonus is that Term Insurance can be converted into permanent coverage and has more choice of options than those with a group life conversion.
Whichever type of life insurance you choose, the most important thing is to choose something, and don’t just rely on your employer’s group insurance. Your financial advisor can guide you through the right products for your lifestyle and your family’s needs. And like Goldilocks, you’ll be able to rest easy when it fits just right.
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios. His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions.
Find Ian online at www.financialfighter.com and on Twitter, Facebook, Linkedin, and Instagram.