The purpose of insurance is to collectively pay premiums, so that we can have money readily available to pay for any unforeseen financial losses. We typically insure assets that are mortgaged or have a loan against them, such as vehicles, homes, commercial buildings, machinery, etc. However, we often forget the most valuable asset of all…our life!
Life Insurance is something that we don’t often think about, or we think it is something that“rich people” need or people with families. We typically don’t prioritize it as a “necessity.” However, if you’ve seen tragedy in families, what happens after can be vastly different depending on if the family did or did not prioritize life insurance.
The FIRST encounter
If you have not been educated by family or friends on life insurance, you’ll likely first come across it when you finance your first vehicle, or when purchasing your first home. You may be asked by the lending agency if you would like to add life insurance or disability/critical illness coverage to your loan to help cover the payments if you were to become disabled, critically ill or die. This is an optional coverage and is not typically required. Despite the convenience of being able to add the insurance at this point in time, we recommend you price out a Term Life or Whole life policy first, as the creditors policies are typically more expensive and don’t offer the same level of coverage.
“I don’t have that much stuff, I don’t think I need life insurance!”
This is a common thought that crosses people’s minds. If they don’t have many assets or much debt, then they likely don’t need life insurance. Despite there being “no loans to pay for,” you may not realize that you are a huge source of revenue. If you are married or have children, the loss of your earnings could be detrimental to the livelihood of your family. They may not be able to afford rent or groceries, especially if you have a stay-at-home spouse.
“How much insurance do I need?”
This is where a conversation should be started with a life insurance agent or a financial planner. We’ve partnered with James Dietrich as our financial advisor and he would happily discuss your life insurance options with you in greater detail. But for fun, let’s put together a scenario for you to visualize.
You live in a home with a market value of $400,000. You have $300,000 left owing on your mortgage. You have $10,000 of credit card debt, and a $25,000 car loan. You have a stay at home spouse who looks after your 2 kids; which you are hoping to save at least $50,000 each for secondary education when they graduate. You have saved up $10,000 so far. In 15 years your kids will be grown up and moving out of the house.
Now if you died, your family would incur funeral expenses (~10k), inheritance taxes (~10k) and your ongoing household expenses would continue at approximately $3000 per month (36k per year).
Now at this point in time, your asset value totals $430,000 (Car, House, Cash), however, your debt/expense combined total over the next 15 years equals $985,000. Now, if your family sold everything, this would leave them short $555,000. This would be an approximate calculation of what your minimum life insurance limit should be. We would recommend a higher limit to maintain quality of life, but this would at least save them from being financially ruined.
“What are the steps or requirements to obtain life insurance?”
You can start by contacting James Dietrich, our financial advisor and he can get you started with your life insurance policy. Tell him that Mello sent ya!
Most life insurance applications (at this point in time), require a telephone interview or face-to-face (zoom) appointment and then a medical examination. These examinations are done in the comfort of your home and the medical examiner will likely take some blood and urine samples to analyze prior to issuing your application approval.
Being honest and truthful throughout the interview is essential to avoid an issue or void application down the road.
“How much would a life insurance like this cost?”
We have partnered with a Creditor Insurance Watchdogs, to create a simple online calculator to compare creditors (banks) insurance rates with a life insurance term policy of 10, 15, or 20 year options. As per our example above, this is the cost comparison for a 35 year old male, non-smoker for a $555,000 life insurance policy.
Approximately $30-$40 per month!!!
“So why is buying life insurance through a creditor less ideal?”
With creditors insurance, over time, the coverage protects a reducing loan amount, however, the premiums you pay continue to stay the same. With traditional term insurance, your premiums will stay the same and your coverage amount will be fixed.
With creditors, the beneficiary is ALWAYS the bank, not a member of your family. However, with traditional term insurance, you have the ability to choose who is named as the primary beneficiary, allowing them to decide how best to manage any outstanding loans or debt.
If you were to buy and sell your home or decide to change lenders due to competitive lending rates, will your creditor insurance need to be reset? Will it be reset at a higher cost due to your increasing age? Or are you locked in with your lender for the risk of having no coverage? With traditional insurance, you have the ability to build your coverage to suit your long-term needs.
SERVICE and SUPPORT
Individuals selling creditor insurance typically do not specialize in insurance products. They are most likely unlicensed and ill-equipped to properly advise clients about the legalities of life insurance. Make sure you have a licensed, experienced advisor who offers a range of products backed by quality insurers.
“What about Corporate Life Insurance and Buy/Sell Agreements?”
A buy-sell agreement is a contingency plan that outlines the conditions in which a partner’s interests in a business may be bought out by the other partners. If this agreement is triggered by a death to one of the partners, it could open up the corporation to uncertainty and future complications.
For one, the surviving family members may get involved in the business to maintain the deceased partners best interests, or (two) if a buy-out is called upon, complications could arise from unfavourable financing terms OR depending on the state of the corporation, financing might not even be possible at all! That is why life insurance is so important – for all the invested parties in the agreement. Not only does it provide peace of mind, it provides immediate liquidity and a prompt payout for the family of the deceased. This allows the business to continue with little interruption, and all parties are paid fairly and quickly.
These buy-sell agreements and corporate life insurance policies can be quite complicated with multiple parties involved within the transaction, so you will want to have a life insurance professional take care of this for you.
What are you trying to say here?
You accumulate many assets over the course of your life. However, nothing is as valuable as your LIFE. Make sure you insure it to keep your family protected for the long haul. Losing a loved one is stressful enough, you do not want to add a financial burden on top of it all. Give us a or James a call today to get started!