6 good reasons for having life insurance
We all know that we should save for retirement, contribute to our RRSP to pay less tax, build an emergency fund, repay our credit cards, etc., but when our financial wealth or our personal situation changes, such as a baby on the way, life insurance may be important to protect our loved ones in case of death. Étienne Belzile-Paquet, leader of the insurance component and financial planner at Desjardins, explains why.
1. Covering funeral expenses
According to a survey by the Fédération des coopératives funéraires du Québec1, the average provincial funeral cost was around $5,700 in 2018. Even with low coverage, life insurance can prevent your loved ones from dipping into their savings or going into debt to cover these expenses.
2. Paying off debts
Mortgage loans, car rentals, lines of credit, electrical appliances purchased in equal instalments: financial commitments often multiply over time. In the event of death, life insurance provides a lump sum that can be used to repay debts and prevent them from being transferred to your family or estate.
3. Protecting your family against loss of income
For a family with children whose goal is to make up for lost income in the event of the death of a parent to maintain the same standard of living, term life insurance may be a good option. A 10-, 20- or 30-year term life insurance will pay a lump sum upon death, provided you pay a fixed premium during the specified period. After the policy term, your personal life insurance coverage will end.
4. For entrepreneurs
If you’re in business with other partners and something unfortunate happens to you, will your loved ones be able to take over your business? A shareholder agreement may put safeguards in place, such as insurance to buy back a partner’s shares from one’s heirs after death. The estate thus receives an amount for the shares, avoiding the need for other partners to co-manage the company with the deceased shareholder’s loved ones. You can talk to a legal advisor to learn more.
5. Maximizing your savings
If you’ve already put a lot into your RRSP and TFSA, insurance offers additional ways to save.
Permanent life insurance, which guarantees life insurance as long as the insurance policy is in effect, may be a tax-efficient way to pass on an inheritance to your loved ones.
Participating life insurance is permanent coverage with flexible participation options. The insurer pays a participating interest annually, in the form of a dividend, which you can use in several ways depending on the choice made during underwriting. In addition to insurance coverage, you may even include a savings component, which can be used in a few ways, such as providing a financial base for your loved ones, financing the growth of your business or increasing your retirement income. The cash surrender value of your policy accumulates tax-free.
Finally, universal life insurance includes a savings component within the policy. “The insured chooses the type of investment, such as guaranteed investment certificates or a Canadian equity fund,” explains the financial planner. “As long as certain rules are followed, amounts are accumulated tax-free.”
6. Because once it’s done, it’s done!
Taking out life insurance usually requires the completion of a detailed questionnaire, and depending on age and health, you may have to undergo certain medical tests. Based on these results, the insurer can determine a risk level and may adjust the rate. Other criteria may be considered when underwriting your life insurance.
If your personal situation changes (such as a baby on the way, a new union or a career change), we recommend that you review your insurance coverage to adapt it to your new reality. “A financial security advisor can help you precisely determine your insurance needs and identify the most appropriate types of coverage for your situation,” concludes Étienne Belzile-Paquet.