Cheat for Level 6: Life Insurance

Who needs life insurance? I’m single with no dependants. No one is depending on the paycheque that I may or not be bringing in each month. If I was hit by a bus tomorrow, I will not be a financial burden to anyone. There is absolutely NO NEED for me to have life insurance at all. Unfortunately, a huge industry exists to sell me as much insurance as it can, whether I need it or not. Kinda sounds like extended warranty to me, but I digress.

If you do have a spouse or partner or kids, then you definitely need life insurance.  What are the questions you should be asking yourself when you are shopping for life insurance?

Do I really need Life Insurance? If you are at Level 6, you should know what kind of money is flowing in and out of your household every month. Now imagine if your paycheque stops coming in; how will that affect the people left behind? If you will have unpaid debt or mortgages, or even if the household relies on your paycheque to pay the bills, then you will need insurance.

How much Life Insurance do I need? This depends on how much you want to help those you have left behind. Some say 6 to 8 times your annual salary. This is a general rule of thumb, but it really depends on what you want to do with the money. Do you want your surviving spouse to be comfortable for a couple years after you are gone? Should there be enough money to pay off the remaining mortgage so that is not a burden? Do you want to leave enough money behind to help take care of your kids until they are 18? Help fund a Registered Education Savings Plan (RESP) for them? These are all questions to consider before determining the amount of Life Insurance you want to purchase.

How long will I need Life Insurance? Ideally, Life Insurance shouldn’t be a permanent need; it was never intended to be this. It was originally intended to protect people when they were younger and were starting to build their nest egg, and something suddenly happens to the breadwinner. As life progresses, you will continue to pay off your mortgage as well as save up enough money to fund your retirement and life goals. Ideally, by the time you hit retirement age, you should have sufficient savings to discontinue your life insurance. Before you discontinue your current insurance, always get a physical from a doctor to make sure you do not have a medical condition that would warrant continuing it.

What kind of Life Insurance Do I Need? Term insurance. This is what makes sense for the vast majority of people. You are buying ‘in case shit’ happens for the finite time that you need protection. That’s all you need. Term policies are the cheapest policies you can get because the probability of you dying in that time period is low (I was in the actuarial field, part of my job was to know what the probability of you dying in the next year is), hence the premium is lower. As a result of the premiums being low, the commission that is paid to the insurance SALESPERSON is also low. Has anyone ever encountered an insurance agent that recommended term insurance? Give me a break! I’m very certain, whether or not the agent was a friend or someone recommended them to you, that they insisted that a whole life or universal life policy was the way to go. Not only will you get the death benefit, there is also an investment component as well! They may have failed to mention that the commissions on these policies are some of the most lucrative commissions in any business; paid for BY YOU! Some “earn” as much as 90% of the first year’s premiums, as well as commissions every year you are paying premiums. Good business to get into to pad my pockets! If you currently have a whole life or universal life policy, please do yourself a favour and pull out everything you have on it. How much have you paid into the policy? How much is it worth now (cash value)? Did they insist that you only need to pay x amount for y amount of time and the investment returns will fund the rest for you? Did they also mention that if your policy does not hit the targeted return, that you are on the hook for the rest? Did they show you fancy charts on how your premiums would grow? Were you able to look at that chart and figure out what the worst case scenario was (ie, if you had to pay the premiums for the rest of your life, what would that equate to?) The more complicated the policy, the more you are paying the agent, the insurance company, and the actuaries to calculate what the premium should be. I assure you everyone is getting their piece of the pie, and it’s all on your dime.

I would ❤ to sit down with you and your policy and go over the details if you want. The best exercise you can do is figure out how much you have paid into it, and then call up your agent and ask how much you are going to get back if you cancel today. The difference has gone into other peoples’ pockets. It might be best to just cut your losses, cancel the policy, purchase the similar amount of coverage under a term policy, and invest the difference in the premiums towards your retirement. Your future self will thank you!

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