Five questions to ask about life insurance

Feel confident about protecting your family's financial plan.

Key takeaways

Don’t avoid thinking about this sensitive topic.
Protect your family’s lifestyle.
Ensure funding for your family goals or to pay off debt.
Confirm you have enough to meet your family’s needs should something happen (this may change over time).
Consider setting up or updating a will to ensure smooth payment of funds.

Very few people are comfortable talking about what happens when they are gone, especially when it comes to the financial implications for the immediate family members. Preparing for your family's future means more than saving; it should also include enough life insurance to provide protection should something happen to you.

Life insurance can help reduce the ﬁnancial impact on your loved ones once you are gone. Having a life insurance policy can provide your family with the opportunity to help replace lost income, eliminate debt, keep a business aﬂoat, protect family wealth, or address other ﬁnancial needs and goals while they adjust to a new life. The cost of protection varies but can be a relatively low portion of your current expenses.

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1. How does life insurance work?

A life insurance policy provides a payment in the event of your death that can help protect your family's lifestyle in the absence of your earning power. This payment can provide resources to your family in paying oﬀ a home loan, supporting your children’s needs, or supporting an elderly parent – providing them with financial security.

Here's how it works: When you purchase a life insurance policy, you’re buying a contract with an insurance company. The insurance company guarantees a payment to your beneﬁciaries based on the amounts you agreed in your contract. This could be a lump sum and/or regular payments to your beneficiaries (such as your spouse and/or children) after your death.

2. What types of life insurance are available?

Most life insurance policies fall into two general categories: term and permanent. A term insurance policy provides coverage for death during a speciﬁc period of time, such as 10 or 20 years. At the end of that period, you normally stop paying premiums and your coverage ceases. A permanent insurance policy covers you until your death, regardless of age—so long as premium payments are up to date. Unlike term, permanent insurance may include an investment component along with the insurance policy; it generally requires higher premiums as a result.

Term insurance is generally cheaper, and in many cases more appropriate, for most buyers. It allows you to gain access to life insurance for a lower premium than you'd need if you were trying to buy the same amount of permanent insurance. It is best used for replacing lost income or a lump sum in the event of death. If you want to transfer wealth to your family, including an estate, the additional cost of permanent insurance may be worth it.

3. When is the right time to buy life insurance?

Simply put - when someone else is depending on your income, there's generally a need for life insurance to provide that support after your death.

You may already have life insurance coverage through your employer. Even so, you may consider purchasing additional coverage independently, because policies you buy outside an employer's plan are portable, meaning your coverage continues even if you leave your job. Also, your employer's coverage may not fully meet your ﬁnancial obligations for adequately protecting your family.

You may also have a benefit through the government, but these benefits are usually insufficient to fully meet your family’s financial obligations.

Generally, the younger you buy life insurance, the less it will cost you. It's a good idea to review your need for life insurance whenever a major life event occurs. Consider the following events and the ways in which life insurance might help protect your family in each scenario:

New home - purchase or major home improvements. Life insurance can help to cover your mortgage obligations in the event of your death.
Marriage - a wedding should prompt you to review your entire ﬁnancial situation, including your income needs, debt, and other liabilities, and to add a layer of protection for your partner and any other dependents.
Birth or adoption of a child - a life insurance policy can provide protection for your family's increased income needs, funding your children’s educational or personal goals, and any debt you may have taken on.
New job - a term insurance policy can replace any group coverage you may have had from a former employer and enable you to increase your coverage amount in accordance with your new salary.

For families with children, if one partner is staying home, it may be important to have life insurance for that partner in addition to insuring the primary wage earner. Consider the value of the stay-at-home parent and the services they provide. In the event of their death, it may put a tremendous ﬁnancial strain on your loved ones and providing a financial support can help them cope. Life insurance can also cover funeral and estate expenses.

You may have the option to purchase additional life insurance coverage for you and your dependents through an employer-sponsored benefits program (e.g. flexible benefits, employer facilitated discounts with an insurer, buy-up option from the company group policy, etc.).

As you consider purchasing life insurance, bear in mind that you'll generally have to provide "evidence of insurability ¹." This means that before an insurer issues a policy, the company will typically require you to undergo a basic medical screening, often scheduled at your home or workplace. Generally speaking, the better your overall health, the lower your premium will be. Many factors contribute to the price you will pay for insurance, such as your age and your health. It's usually easier—and less expensive—to buy life insurance in your twenties and thirties than in your forties, fifties, sixties, and so on. Sometimes health issues arise later in life that can make insurance diﬃcult or costly to obtain. You should look at the rates you can obtain from a number of insurers as an individual compared to those your employer has secured (which are typically based on their overall employee population in the country in which you work).

4. How much life insurance do you need?

There are several ways to go about determining how much coverage you need. One simple method is to buy coverage of between 5 to 10 times your annual salary. Other methods are more precise and take certain aspects of your ﬁnancial situation into consideration, such as the capital you've already accumulated, your borrowings, and the speciﬁc costs for which you’d like your family to be covered in the future.

If you can aﬀord to retire—meaning you no longer need to work to support yourself and your family—then you may no longer need term insurance. However, even then some individuals want to provide a lump sum for their family.

One of the major beneﬁts of term life insurance is its ability to protect your dependents at an aﬀordable price. Take care to avoid buying a policy with premiums you may not be able to aﬀord in the future. It is better to buy a smaller policy with premiums you can comfortably aﬀord than to buy a bigger policy that you have to let lapse because you can’t pay the premium.

5. Mechanism of payment and setting up a will

You may wish to consult with a financial and/or tax advisor on the considerations above before buying any life insurance. They should also help you consider the need for and process of setting up a legal statement of what should happen to the funds (part of your “will”). See our estate planning checklist for more information on what to consider when setting up a will.

In many countries, life insurance allows for the funds to be paid to your beneficiaries without delays to meet any immediate expenses before the finalisation of the process of settling a will or estate.

Lastly, you should note that it is possible that proceeds from a life insurance policy may be subject to taxes.

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