I tell you a secret: insurance is the most boring subject ever!, as my teenager would say. But it remains a very important aspect of personal finance. And if you take the trouble to see it as a movie where you are the hero, things suddenly become much simpler and more interesting.
Let's keep it simple. Your needs in life insurance vary depending on your age and family situation. Let's split your life up four phases, and let's see the respective needs for each of them.
1- For studies and single
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Classic case: you go toschool and you drag some debts. Without spouse or child, all your insurance must cover in the event of death are your funeral expenses and paying off your debts. Otherwise, your estate, probably your parents, will inherit the bills. They can certainly renounce the succession, but it will cost them $ 1,500, in addition to the funeral costs. Insurance with cover not more than $ 50,000 will do the trick, as long as you're single without a home.
Some people choose to buy coverage for up to $ 250,000 at this stage of life. The goal is to protect his insurability, that is, its ability to buy insurance at a good price. What you need to understand is that if you have cancer or you weigh 400 pounds, no insurer will want to insure you, or some will accept you, but charge you the full amount. If you buy one temporary contract, your insurability is protected for life and for the amount chosen. A 10-year temporary contract for a healthy young person of $ 250,000 costs less than $ 160 per year if that person does not smoke. This is also the reason why some people decide to cover more than they need at this age. It doesn't cost much, the probability of death is so low.
2- As a couple in your first home
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The day you are in a couple with a house, you must cover an insurance need for $ 200,000 to $ 250,000. The reasoning is as follows: you want your surviving spouse to be able to keep the house in the event of your death. Now, once you eat the dandelions by the root, it will become 100% owner of the house … but also 100% owner of the mortgage! And taxes. If in addition to mourning your death, your spouse becomes poor because of it, not sure that he will keep such a beautiful memory of you …
3- A first child arrives in the portrait
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When children arrive, the need for life insurance changes dramatically. The goal is to use insurance to cover your salary, because your children are addicted to it. An example: you earn $ 100,000 a year. Once the tax is on your body, you have about $ 60,000 left. You have personal expenses of $ 10,000, so there is a $ 50,000 net income that is really used for the family. With this income we do everything: we pay for the house, taxes, debts, we invest for retirement, we pay for children's studies, etc.
So, if we want to cover this $ 50,000 in income, we have to say: for how long will this baby need it? The answer is usually 25 years. So how much coverage do I need to replace this income for 25 years? The answer: about $ 1 million (this in order to generate $ 50,000 in annual income, indexed at 2% to protect against inflation, and with the assumption that our investments will bring in 4% on average). If, in the couple, one person earns $ 100,000 and the other earns $ 50,000, it is ideal to buy an insurance policy that will give, at the time of death, $ 1 million and $ 500,000 respectively. So the goal is no longer to cover debts, but to protect income.
4- Then, and until our death
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When you are young, temporary products are inexpensive and cover large insurance capital. If we want to keep insurance all our lives, we must permanent insurance , and that is expensive.
Who is this permanent insurance for? To the people who want and who MAY leave a legacy. This is why we often wait until we know all the information. Have I had children? Do they deserve a legacy? Do I have enough money for my retirement? What good is it to leave a legacy if you have a life of misery after 70 years … In short, no need to buy permanent insurance before you are 55 if you have not first maximized our TFSA and our RRSP. You just have to “make sure you are insurable” there. That’s why you have to have a transformable temporary contract anytime before these important decisions.
Remember that permanent insurance is a form of placement. Indeed, the insurer charges you much more than your insurance cost when you are young, and places this money so as not to make a deficit when your insurance cost is higher and your knees take more than 15 minutes to unload every morning.
David Descôteaux has been a columnist and economic journalist for several years. He is also the author of the bestseller in personal finance “Debt to a millionaire” and a series of children's books on economics and finance.