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GUEST COLUMN: Term life insurance
Purchasing life insurance could be one of the most important steps you can take in protecting your family’s future.
Let’s specifically address term insurance, what it is, determining the amount of death benefit, and comparing term insurance to group life and mortgage insurance.
What is term life insurance?
Term life insurance is generally the most reasonably priced insurance and can be tailored to meet a family’s budget.
On your death, a payment is made to the person or persons you designate (the beneficiary) and they decide how to use the money. Term insurance is usually purchased to meet a specific need, for example to pay off the mortgage, income protection for a young family, or pay off personal or business loans or to provide money for your children’s education. The cost of the insurance (the premium) you pay is based on your age, health, smoking status and the amount of coverage you require. Premiums are level for the term of the contract (typically 10 or 20 years), and at each renewal period premiums will increase to a new amount and remain level until the next renewal date.
How much term insurance should I consider?
An initial consideration could be repayment of the mortgage in the event of a death of either spouse. Additionally individuals should consider how much of their spouse’s income is required to sustain the family’s current standard of living and the cost for children to complete their education. A rule of thumb is seven-to-10 times an individual’s earnings).
Each family has its own specific insurance needs and these should be evaluated on a case-by-case basis.
What type of term insurance policy should we consider, and what length?
There are two options for consideration. Each spouse can have an individual policy for a specific death benefit. In the event of either spouse’s death, the beneficiary (or beneficiaries) receive the insurance proceeds and the surviving spouse has their own insurance policy still in force.
Or they can buy a joint policy which would pay the beneficiary on the first death of either spouse.
What about my group life insurance available through my employer?
Group insurance policies are based on a factor of your annual earnings, normally one-to-three times annual earnings. Group policies generally will not be sufficient enough to pay off the mortgage, or provide an amount to sustain your current standard of living.
Also remember that a group plan only applies while you are an employee of that company. You should consider what happens to your life insurance benefit if you’re temporarily laid-off or your employment is severed and the coverage provided by a new employer?
In addition, group life insurance rates usually change annually and are not based on the individual’s personal health or age.
What about mortgage insurance?
A good temporary measure is to insure your mortgage, however, have you considered that the beneficiary of the insurance is the financial institution who holds your mortgage?
In addition, while the premiums may be level, the actual amount of coverage is declining based on mortgage payments that reduce the principal of the mortgage. Mortgage insurance premiums are typically higher than comparable term life insurance.
In terms of covering a specific need for a specific time frame, consider term life insurance, as a complement to, or for replacement of group life insurance and mortgage insurance.
Brent Barker is a certified financial planner with The Fraser Financial Group, Vernon. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.