The Importance of Life Insurance

Hopefully, you never had to learn about the importance of the life insurance the hard way. Unfortunately, things don`t always happen the way we expect them to, so it is important for us to be prepared and financially covered... Especially because having a life insurance policy is a very non-selfish thing to do, since it is not an investment for ourselves, but for our loved ones. And to be honest, I sincerely hope this insurance is the worst investment you will ever make, meaning that you will live a long and healthy life and won`t need to cash on it...

In this article, I will only concentrate on life insurance. You may ask why... Well, primarily because as a mortgage broker, I am legally obliged to offer you mortgage life insurance product every time you sign up for a mortgage. As a matter of fact, by law, any time you apply for a credit in Canada, be that a mortgage, car loan or a credit card, you must be offered some type of insurance. And since the mortgages are usually the largest of all credits, life insurance must be offered every time this type of a credit is undertaken.

There are tons of life insurance products on the market... Too many for us common people to swallow. For the purposes of this article, I will break them into three categories:

1) Mortgage Life Insurance, 2) Term Life Insurance, and 3) Permanent Life Insurance. (All three may offer protection from creditors or tax implications occurring at time of death by making payment directly to beneficiary.)

Mortgage Life Insurance is offered to you every time you take on a mortgage. You do not need to accept it ("apply for it" would be the correct terminology), but if this is the case, you must decline it in writing.

Mortgage Life Insurance works like this. You pay a premium that is determined at the time of the application, and which is based on your age, health, lifestyle and the size of the mortgage. The premium will never be increased as you get older, but it will also not decrease as your mortgage gets smaller. At the time of death, the bank will pay off the balance of your mortgage. Your health is not checked during the term of the insurance policy, so this could be a good product for individuals who plan to stay in the same house for a while, and in certain cases, with the same bank.

It is important to distinguish Mortgage Life Insurance products offered by the branches of the banks and those offered by the mortgage broker. Typically, if you get a life insurance from one of the major banks, your policy will be cancelled the minute you leave that bank. On another hand, if you get it from a mortgage broker, the policy is underwritten by an independent insurance company, and could be moved "in kind" if changing banks.

Term Life Insurance policies are definitely the most affordable products on the market. They are suited to meet high, short-term protection needs. The premiums are set for the term that you chose, and are based on your age, health and lifestyle. The terms offered are typically 5, 10 and 20 years. The policies are renewable after their expiry, and proof of health may not be provided in most cases, but premiums would increase as appropriate for your age.

Term Life policies are not directly tied to the mortgage. The person who takes the insurance pays the premium and in case of his/her death, a death benefit is paid to policy`s beneficiary. However, if the beneficiary of the insurance policy is also the beneficiary of the property of the deceased, the common approach would be to use the funds to pay off the mortgage.

Term Life policies are perfect for individuals or families who are looking to avoid potential financial crisis if a death in the family occurred during a period when their outstanding debt is highest. For example, if you get a sizeable mortgage that requires two salaries to pay for, you may want to take on the policy for a period of time until the mortgage is low enough to be carried on only by one salary.

Permanent Life Insurance is the "fully loaded" version of the life insurance available. It is also the most expensive, typically between 3 to 5 times that of term life insurances. There are two main reasons why.

One, permanent life policies are designed to be in-force for your entire life and pay a death benefit. And since we know that other than few exceptions, nobody lives forever :), higher premiums have to be collected to ensure sufficient funds are available to pay a guaranteed death benefit. Premiums can be paid throughout your entire life or within a certain elected time frame typically 10, 15, or 20 years but coverage is enact for the life of the policy holder.

The other reason is because permanent life policies have a cash component. In other words, a portion of the premium builds a cash value of the policy which contains investments that grow tax sheltered within the policy and is paid out tax free to your beneficiary at death along with your coverage amount. This cash value can be used as collateral for a loan to generate additional cash flow for the policy holder. Or in rare cases were the policy holder must cancel the policy this cash value is returned to the policy holder but is subject to taxes.

Permanent life policies are designed for those individuals who are looking for both short and long term protection benefits. And as long as the premiums are paid for, the policy will continue in force until the death, regardless of what age and health style that may be.

 What type of policy is right for you? Only you can find this out, with the help of insurance broker, individuals who specialize in life and other types of insurance policies.

As a mortgage broker, I can only advise you to ask yourselves this: If you have a mortgage, what would happen with  your property if one of the income earners suddenly passed away? Will the remaining party be able to carry the payments on its own? If yes, great. If not, you should seriously consider thinking about insurance. Because insurance is not about you, but about those who remain after you.

Tino Brelak, MBA


### Posted on: February 18, 2012 by Tino Brelak.


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