One of our neighbours passed away recently after a sudden and tragic accident. It was a big shock to everyone who knew him, and I can’t imagine what his widow and kids must be going through right now. What makes the whole situation even worse is that he wasn’t carrying life insurance.
It turns out our friend had recently changed jobs and hadn’t yet qualified for a comprehensive benefits plan. Myself and a few of our other neighbours made a little contribution to help his family out with final expenses, and while his widow was very grateful, I got the sense that she’s really struggling with financial worries on top of everything else. I decided I wanted to help my readers avoid the same kind of situation, so I did some digging into the ins and outs of life insurance.
Life vs. Disability and Mortgage Insurance
Some people choose other types of insurance, including disability insurance and mortgage insurance, instead of carrying comprehensive life insurance. Both disability and mortgage insurance provide a measure of financial protection, but from a general standpoint, life insurance is usually better.
Mortgage insurance, for example, often costs more, and its premiums usually remain steady even though the financial protection it provides diminishes as the mortgage is paid down. Worse, the holder’s medical history can affect claims after the fact even though this isn’t evaluated when the policy is initially purchased. For my money, it’s too risky to be counted on as a substitute for life insurance.
Disability insurance is worthwhile in situations where the policy holder works a high-risk job, or engages in hobbies or activities that pose significant potential dangers (for example, motorcycling or extreme sports). However, life insurance policies can be designed as investments, and disability insurance policies don’t usually offer this added flexibility. I would recommend discussing disability and life insurance policies with a financial adviser or insurance professional if your lifestyle suggests this would be wise.
How Life Insurance Protects Loved Ones
Life insurance policies help with much more than just final expenses. Their proceeds can be used to:
- Cover future educational expenses for surviving children
- Replace income lost by the passing of the policy holder
- Settle the policy holder’s outstanding debts
- Finance expenses related to the decedent’s estate
- Purchase a business partner’s interest in a co-owned company
One excellent piece of advice I found related to how much coverage a policy should offer. Insurance professionals generally recommend carrying a policy with benefits that will cover the amount of income the deceased person would have earned had he or she gone on to live a full life to retirement age.
Common Life Insurance Mistakes
I also came across a lot of horror stories, in which people who were carrying life insurance discovered that their coverage didn’t actually provide the protection they thought they had. Here’s how to avoid winding up in that kind of situation:
- Don’t rely solely on a life policy offered through an employer. These policies generally offer fairly limited forms of coverage. More comprehensive protection is available on a supplemental basis, and provides much more peace of mind.
- Carefully consider the respective merits of term insurance and cash value insurance when purchasing a policy. While cash value policies are usually more expensive, they also provide more complete protection that can make a major difference.
- Don’t assume you can cover any life insurance shortfalls by dipping into retirement income. This can completely destabilize an otherwise sound personal financial plan.
- Don’t rely on guesswork when choosing a coverage limit. These limits should be carefully calculated in advance of purchasing a policy. Again, insurance professionals and financial advisers can help.
The biggest mistake of all is to carry no life insurance, especially if spouses or children are involved. This leaves surviving loved ones extremely vulnerable to financial burdens that will almost certainly add to their stress and suffering. Losing a loved one is hard enough without having to worry about making ends meet after the fact.
Find a Reliable Insurance Provider
I’ve switched most of my insurance coverage to InsureMy, a flexible and progressive new provider available to residents of Alberta and Ontario. Their representatives are very helpful, and are more than happy to explain the details of their policies in language that’s easy to understand. Give them a call to learn more!