Submitted by Brendan Donahue & Sara Worley
Investment Advisors, Manulife Securities Incorporated
Insurance Agents, Manulife Securities Insurance Inc
According to a recent study by the Life Insurance and Market Research Association (LIMRA), 68 per cent of Canadian households have life insurance. Here are some of the most common reasons people buy life insurance, and why it might make sense for you.
It’s been widely stated that a person’s greatest asset is their capacity to earn income. This makes income replacement one of the most common reasons why people buy life insurance.
Though income replacement is less important as people age, it can be paramount to young families. According to LIMRA’s Trends in Life Insurance Ownership study, among households with children under 18, three quarters of households admit they would have immediate trouble meeting everyday living expenses if the primary wage earner passed away.
Some families choose to buy life insurance to cover their debts. After all, if a family’s debts are paid off there is less financial burden on the surviving spouse.
For most Canadians, the single largest debt in their lives is their mortgage. Some mortgage providers offer mortgage insurance to cover this debt if the holder passes away. While this is a good idea, it’s often a better idea to use a personal life insurance policy rather than mortgage insurance.
Firstly, life insurance policies are usually cheaper than mortgage insurance. Secondly, with mortgage insurance, the value declines along with the balance of the mortgage, but the premium does not. Personal life insurance policies retain their original value, no matter how much is owed. This can free-up money above and beyond the mortgage balance for other debts, or income replacement.
Life insurance isn’t just for individuals. It can help protect a business from financial loss, instability or liabilities arising from the death of a business owner/partner. It can also help by providing funds for a buy/sell agreement or cross-purchase between partners and their estates.
Tax and Estate Planning
Proceeds from a life insurance policy are received tax-free as long as they are earmarked for a named beneficiary. Though it is not advisable to have all of one’s wealth tied up in life insurance policies, it can be a great way to tax-shelter a portion of one’s estate.
The average funeral in Canada costs $8,500. Because of this, some people choose to buy a small amount of life insurance to cover this cost.
Creating an Estate
People with modest incomes and savings may decide to buy life insurance as a way to provide an estate for their heirs. Others may want to increase their estate. The key here is to consider how long you should reasonably expect to live and decide if you want to own life insurance, or simply save the money instead.
Estate settlement can be a long, tedious process. Life insurance can help this by providing cash quickly to cover expenses and provide for family while the other estate assets are being dealt with.
Some people wish to increase or create a pool of money for charitable giving that is much larger than they would otherwise be able to set aside. Donations to registered charities also receive certain tax credits that can help with one’s final tax return, possibly providing even more assets for their beneficiaries.
Though it can be a somewhat unpleasant topic, life insurance is an important and often necessary part of most people’s financial picture. At its core, life insurance is a risk management tool, designed to provide funds at the time of a person’s death.To learn more about life insurance, speak to your financial advisor. He or she can help to determine an appropriate type, amount, and premium to match your financial situation.