The following post is written by Brian So from Brian So Insurance
Buying life insurance, like buying a home, is a long term investment. You wouldn’t go house hunting without doing some background research on important points, such as location, cost and mortgage rates. So why would you buy life insurance without also doing proper due diligence? Here are three things to think about before buying life insurance.
1. Why you’re buying life insurance
The reason you’re buying life insurance should be very clear to you before you go out and shop. You can think of this as your life insurance goal, similar to how you have a financial goal. Most readers’ goals will likely be to provide support for their family in case something should happen to them. Baby boomers near retirement may want it to preserve their estate for their children and grandchildren or as a gift for their favourite charity. Once you have a goal, you can develop a plan to reach it.
2. How much life insurance coverage you need
The amount of coverage you require typically boils down to two factors: cash and income needs at death. The cash need includes paying off the mortgage balance and other debts, setting up an education fund for your children and emergency fund for the family, and final expenses. The other part of the equation, the income need, is used to provide an ongoing stream of income for your family. You can do a rough estimate on how much coverage will be needed to ensure income for a certain number of years, or you can use the many life insurance calculators online that will produce a more accurate result. Please see my post herefor more detailed information on how much insurance coverage you need.
3. Have a budget in mind
You may already know about the 2 major types of life insurance: term and permanent. Term is purely for protection purposes with premiums that increase whenever the term expires. Depending on the specific product chosen, permanent life insurance may feature cash values, investments, dividends, increasing coverage and limited pay options. Term is seen as more budget friendly than permanent, especially during the early parts of the contract. But don’t just look at the initial term price though, because the premium jump after the term expires can be drastic and will likely outpace the increase in your income. This is why I mentioned life insurance is a long term investment. You don’t want to buy a term-10 product because of its low cost, only to cancel it in year 11 when you still need it because the premium is now 3 times as much. Budget for both the present and the future.
I’ve presented three points to consider before you buy life insurance. What else do you think is important?
Brian So, CFP, CHS, is an insurance broker and blogger at briansoinsurance.com. Follow him on Twitter for his musings on life insurance and why the Vancouver Canucks will win the Stanley Cup next season (Seriously).
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