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September 26, 2018

Life Insurance – Do You Buy, Rent, or Borrow?

Without a doubt, life insurance is valuable protection provided by your employee benefit plan, but should it be the only life insurance coverage you have?  Probably not, if you want to ensure you have sufficient long term protection to cover all your family’s financial needs should you die unexpectedly.

In a recent study conducted by the Life Insurance and Market Research Association (LIMRA), it was reported that 61% of Canadians hold some form of life insurance.  Surprisingly, it also revealed that only 38% of Canadians own an individual life insurance contract. This means that almost 40% rely solely on the life insurance provided by their employer. This can be problematic.  The disadvantages of having your employee benefit plan as your only life insurance protection include the following:

It is probably not enough to pay off your mortgage and/or provide income for your spouse and family.

The amount of life insurance protection provided by group insurance in most cases is equal to only one or two times annual income.  If this is not enough to do the job, the addition of individual life insurance should be considered.

If you lose your job, you may also lose your life insurance protection.

If you are currently employed in an industry or with a company that may be at risk due to economic conditions, you may find yourself with no life insurance at all.

Upon retirement, or if you leave your job, in most cases you will lose your group insurance.   While group life insurance usually contains an option to convert to an individual plan, the plans that are offered are usually restrictive or very expensive.

What place should group life insurance hold in your planning?

To answer that question, let’s first look at the differences that individual life insurance has compared to group. Individual life insurance comes in two forms– term life insurance (which expires at a certain age) and permanent life insurance (e.g. Universal Life or Whole Life) which provides protection for one’s entire life and can also build savings through a cash value.

One can consider the specific type of life insurance, therefore, as being one of three categories:

  • Permanent life insurance – the type you own. By paying your premiums each year you build up equity in your insurance.  At some point in time, the policy may be fully paid up or self-supporting.  You can even take advantage of your equity in the policy by borrowing – similar to borrowing against the equity in your home.
  • Term life insurance – the type your rent. Term life insurance usually has a renewal period which could be ten years, twenty years, or even longer.  At the end of this period, your “lease” renews for a higher premium (“rent”).  When you rent a home you never build up any equity and this is the same with term insurance.  After paying all those rental premiums the policy expires at a certain age with no cash value.
  • Group life insurance – the type you borrow. You, the insured do not have a contract with the life insurance company as that arrangement rests with the employer. The employer and the insurance company retain the right to cancel the entire benefit plan. As a result, the analogy can be made that your employer is “lending” you the coverage.

In reviewing these three types of coverage, it is advisable that you should have a base or foundation of permanent coverage which would provide protection for life at a fixed cost. This also provides the added advantage of creating equity which could be borrowed against should a future need for cash arise.

You could then consider layering lower cost term insurance to protect a growing family and ensure that there would be enough capital to retire debt and provide for family income.  With a family, there is a very high dependency period when the children are young, and the expenses are high.  Low cost temporary insurance is used to provide adequate protection during this period.  Term insurance also comes with the bonus of being convertible to permanent coverage should you become uninsurable with a far greater choice of options than those with a group life conversion.

Lastly, for those with group life insurance, this coverage can be looked upon as forming part of the term insurance needed or as a top up to provide for contingencies.

Give me a call if you would like to discuss restructuring your life insurance coverage to provide the maximum result.  As always feel free to share this article with those you think would benefit from this information.

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