Last year I spoke with representatives from the insurance industry to learn about how life insurance works from a client’s point of view. There seems to be 2 difference kinds of insurance plans: term, and permanent.
Term life insurance will insure someone for a specified length of time like 5, 10, or 20 years. A premium is paid every year and if the person dies within the time period then the policy pays out the death benefit to the beneficiary. This is the most straightforward life insurance plan and works very much like auto insurance. A fee (premium) is paid to insure something for a limited period of time.
Permanent life insurance is a little more complicated because it branches out into sub-categories like participating, non-participating, universal, etc. But all of them are basically policies that insure you for as long as you live 🙂 For example, when I had a quote done for myself I could pay $3000 a year in premiums for the next 20 years, and then stop paying forever. My hypothetical death benefit is $250,000, but everyone’s insurance amount will likely be different.
Fellow blogger Brian wrote a comprehensive article about term/permanent life insurance comparison, and which type individual should choose. He works in the industry. 🙂
The cost of the premium will depend on age and if you are a smoker or non-smoker. $2000 a year is pretty cheap for $250,000 coverage. But if I was 50 years old today and began smoking tobacco, then my premium would be many times higher. The cost of life insurance may also differ from country to country. I’ve heard some insurance costs are cheaper in Australia.
The most prominent reason to have life insurance is to financially protect one’s dependents. But another reason may be for one’s own retirement savings. With a participating life insurance for example, policy holders will share in the profits if the insurance company makes money. With universal life insurance a part of the premium will go into an investment fund that can grow over time. In either case it’s a bit like forcing oneself to save, similar to paying a mortgage. When a person retires one day he or she could cash out the investment part of the insurance policy 🙂 People should consider getting life insurance if they have children, or plan to have dependents in the future, or if they want another way to save for their future outside of an RRSP.
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Random Useless Fact: It’s called “slang” because it’s short for shortened language.
We’ve obtained an insurance policy for me and my wife last year. We’ve decided to go with term life for now – the logic here is that the next 20 years will be crucial for us in terms of building wealth – after that we’ll be pretty much set. So, we’re protecting ourselves in case one of us dies (morbid, eh?) so the remaining partner can easily replace the income and keep following the plan.
I’d also add that life insurance offered by mortgage companies SUCKS big time.
Congrats on buying insurance for you two. People who fail to plan, plan to fail 🙂
Oh god avoid any and everything but term life insurance!
And term life insurance should only be purchased if one has a family that is dependent on one’s wages.
As with most insurance policies – just like the lottery – it is a tax on those who cannot figure out statistics, odds, and calculate basic mathematics.
Most people I’ve talked to also say term insurance is the way to go 🙂 Lol, I play the lottery regularly even though I know the odds are against me 😛
1 in 85,900,584 odds of a $5 Lotto Max ticket turning into a jackpot winner seems like just a teeny weeny bit of a stretch to me 😀 😀 😛
Any reason why life insurance in Australia is much cheaper than other countries? Seems odd unless their life expectancies are much higher than other countries as well, or the insurance companies don’t want to profit…
I’m not sure. That’s a great question. At first I took my friend’s word for it who lives in Australia. But I didn’t find any clear evidence of that online. I believe Australians have a longer life expectancy than people in North America, but that shouldn’t make a huge difference. So I’ve edited out that part of the article for now, until I hear back from my friend with some reliable studies. I wonder how affordable life insurance is in Canada though, relative to other country. I know we have an older population on average than the U.S. but on the other hand we don’t seem to have the high medical costs and obesity rates. Would be interesting to see some comparison of life insurance premiums 😕
“Buy term and invest the rest” is a phrase I remember from the book the wealthy barber.
And term should only be used to insure the money makers of the family to protect the family at their most vulnerable times in life. (ex. having a young family with a mortgage and only one parent working to support the family).
Mr. Chilton gives some of the best financial advice hehe 🙂 Times may change, but good money habits don’t.
Life insurance can also be a good retirement plan. Many people settle and apply for life insurance to secure their beloved one’s in times of unexpected things to happen.
Me and the HB have been talking about life insurance, and I think we’ll hold off on it until we have kids. We have enough in the bank/investments to cover things if one of us dies, but that’s also because right now our cost of living is low and we just rent, we don’t own any property.
I’m not buying insurance right now for the same reason, I don’t have any dependants yet. Life insurance is something to think about but like any other insurance, it’s a personal decision.