Life insurance has many uses, with the three of the most common being:
- to provide for survivors’ living expenses in case of untimely death,
- to help fund the income tax liability on death,
- to provide a source of funds in the case where a shareholder in a business passes away.
This article will discuss some of the issues regarding providing for survivors’ living expenses.
For somebody who has recently started a family, life insurance should be seriously considered. Most salaried employees have life insurance coverage at work. However, such coverage is usually insufficient, as it normally provides coverage based on some multiple of salary, usually two or three times salary. When looking at the expenses of raising a family, with inflation and the rising cost of a university education, two times salary will not go very far in providing for dependents. Whereas company coverage might provide, for example, $200,000 of insurance coverage, based on a multiple of salary, a detailed insurance needs calculation could arrive at a much higher number, perhaps $500,000 or more. Every family’s circumstances are different, so it is best to get a customized assessment done.
The largest debt that most individuals will carry is the mortgage on their home, for which banks usually offer a life insurance policy to cover the balance owing in case of death. Individuals might apply for such a policy out of convenience. However, such policies have a number of drawbacks. The amount of coverage will vary with the mortgage balance, so that as the mortgage balance declines, the insurance coverage also declines, while paying the same premium. Should one want to shop for a better rate on the mortgage and go with another bank, the current mortgage insurance policy is not transferable, meaning having to apply for another policy at the other bank. There is also less flexibility with a bank-owned policy compared to an individual policy in terms of options, such as converting to a permanent insurance policy at a later date.
It is advantageous to apply for life insurance as soon as the need arises, since premiums increase with age. Also, a person who is currently in good health and eligible for a preferred rate now, might experience a change in health, resulting in either a higher premium or worse, a denial of insurance coverage.
Determining the right amount of life insurance coverage requires a little more thought and analysis than what we are provided for through work or at the bank.