Daren Givoque, Financial Advisor
O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
Life insurance is all about risk mitigation. It’s about protecting your loved ones financially if something should happen to you unexpectedly. There are so many insurance products out there that it is often difficult to sift through policies and find the one that is right for you. Insurance companies aren’t always great at being clear about which insurance plans are best for each individual client. Here are a few things you should know about life insurance and some tips on how to pick the policy that is right for you.
Insurance companies are for profit businesses
Insurance companies make their money off calculating risk. Typically, the more likely you are to die the higher your insurance premiums will be. Insurance companies group people into different categories of risk (ex. non-smokers, smokers) and they know how much they need to charge in premiums based on calculating the risk of death for each grouping of people. A smoker will typically pay 3-5 times more in insurance premiums than a non-smoker because of statistical data that indicates that smokers are more likely to die sooner than those who don’t smoke. When it comes down to it insurance companies do protect you in case of unexpected death, but they are also in it to make money.
The best policy is the longest you can afford
As a general rule, the longer the policy the better. A Term 20 insurance policy will cover you for 20 years with a fixed premium that will not increase. A Term 10 policy will provide you with the same coverage but only for 10 years. At this point if you wanted to keep it you would face a premium increase.
Term 10 policies are cheaper than Term 20 because there is less risk involved for the insurance company. A Term 10 policy might cost you $20/month while a Term 20 policy would be $30 or $35/month. While paying $20 for the same coverage might seem attractive in the short term, the issue comes up when it is time for it to be renewed. At the ten year mark it is certain that your insurance premiums will go up as you will be a decade older and if you decide to keep the original policy it could cost you as much as 3 to 5 times more premium.
One option is to apply for a new policy altogether but there is no guarantee that you will be healthy enough to qualify for a new policy ten years down the road. This is why paying a bit more for a longer-term policy is better than saving $10-$15 a month for a shorter policy. You end up paying less in the long run and are guaranteed the insurance pay-out for longer should something happen to you unexpectedly.
In certain situations, it might also a make sense to buy a Term 65 (which guarantees you coverage until you are 65) or Term 100 (which guarantees you coverage until you are 100). However, these policies are more expensive because it poses more risk for the insurance company.
It may seem counter-intuitive to buy life insurance when you are in your 20s, have no money and likely no dependents to look after if you pass away. However, this is the best time to buy life insurance. Unless you have a health condition it is likely that you will be in the best shape of your life and as a result your insurance premiums will be at an all time low.
If you buy a Term 20 insurance policy when you are 25 it will last until you are 45. In that time are you likely to have built a career? Gotten married? Had a family? Probably. Therefore, it is good to get locked into a plan young. It will never be cheaper to get insurance than right now.
The most important part of buying insurance is understanding your options. A good financial advisor will typically look at how much debt you have, what your annual income is and if you have children or a spouse to calculate the amount of insurance you need. Using this information, they will be able to advise you on the insurance product that works best for your situation. There is no reason to go into a meeting with an insurance agent blind. Know what your needs are and what you are willing to spend before you buy into a policy to avoid getting trapped in an agreement that is not in your best interest.