OTTAWA – Talking about life insurance can be uncomfortable because it means contemplating what happens if you die, so Rob Knight has a trick when discussing the topic.
Knight, an investment adviser and director, private client group, with HollisWealth in Cambridge, Ont., asks clients to imagine what would happen if they died yesterday.
“Since they are alive today, they don’t worry about it as much,” he says.
But despite the discomfort in talking about it, Knight says insurance can play an important role in your financial plan.
If your death isn’t going to affect anyone financially, then you probably don’t need life insurance. But if it will, then you need to start thinking about how you can use insurance to protect your loved ones.
In determining how much life insurance, Knight says you need to consider what you owe and what you may want to replace in terms of income for those that remain.
If you’re a high-income earner and the sole breadwinner in your family, then you may need to consider more than if that’s not the case.
“The question that I ask clients is, ‘How much of this income do you want if something happens to person A?’” Knight said.
“It is sometimes a gut answer and other times it is pure math.”
Jeff Hull, a senior financial adviser at Manulife Securities, said it is important to understand the purpose of the insurance.
“For a young family with a big mortgage, that could be safety and security as their prime objective or goal, and if they were to lose their breadwinner they would be destitute,” Hull said.
“For someone later in life, it could be an estate planning purpose to buying life insurance to leave a legacy for a cherished beneficiary or to donate to charity or to cover income tax at death.”
Life insurance can take different forms.
With term life insurance, you’re covered for a set period of time, often 10 or 20 years. Depending on your age, term policies can often be renewed until you reach a certain age. Permanent life insurance continues until your death.
Hull said most people tend toward term insurance because it can appear to be cheaper, but permanent insurance policies offer some advantages.
Most permanent or whole life insurance policies have a savings component that grows as the years pass.
“It might be a little more expensive up front, but over time as you build the savings component into it, over time there is a potential of having that insurance policy pay for itself with the savings that are built up,” he said.
It is also important to regularly review your life insurance because your needs will change as your own personal circumstance evolve.
Marriage, the birth of children, the purchase of major assets such as a home are key points when you will want to be sure to review how your life insurance fits within your financial plan.
“You don’t necessarily have to change your policy, but it is good to revisit it, just to make sure the plan and the purpose and the need as to why it was purchased still exist and whether it has to be upgraded or downgraded,” Hull said.