Not keeping your life insurance up to date can have grave consequences

Picture this: you're on your honeymoon, kicking back with your new spouse, enjoying your drink of choice on a beach with white sand.

But — insert record scratch sound — have you remembered to make them the beneficiary of your life insurance policy?

If not, then the love of your life won’t see a dime from your insurance company if anything happens to you.

In one extreme case that's in front of a federal appeals body, a thirty-something widow is appealing the Canada Pension Plan’s decision not to grant her survivor’s benefits until she turns 65. Daniel Derksen did not have life, mortgage or group insurance before his death from cancer at 38. His widow is now responsible for covering all the debts they accrued as a couple on her own.

According to Aviva North, an advisor with Sun Life Financial, it’s important to get a policy with a death benefit that's large enough to settle any debts and provide enough cash flow for your beneficiaries to get by.

“No one thinks they're going to pass away. Try to imagine as hard as it is, ‘if my spouse were to pass away tomorrow, what would that look like?” says North.

Aside from getting married and having children, there are lots of other life events that should trigger a review of your current policy: filing for divorce, receiving a windfall inheritance, starting a business, deciding to go back to school, even fluctuations in your income, for instance.  

Essentially, you don't buy life insurance once and forget about it: your policy should evolve with you as your needs change.

Try to imagine as hard as it is, ‘if my spouse were to pass away tomorrow, what would that look like?

Keeping your policy updated ensures you’re not paying too high of a premium — an issue a married couple that North advises is grappling with.

After their first child, the couple bought a term life insurance policy that provided coverage for 10 years. (There are two policy types: term life and permanent life.) Not long after that, they welcomed two more children and took out a second mortgage.

Term policies allow you to exercise the option to take out a new policy at specific dates, or convert it to a permanent life policy (which guarantees coverage for life but comes with higher premiums). In this case, the couple allowed their insurance policy to automatically renew for another ten years, but since the cost of insurance goes up the older you get, their premium tripled.

“The premiums at that term are much higher than if they applied for a fresh policy. In this client situation, good news is they still have their coverage,” says North. “But a 20-year term policy would be better for them because that follows the length of time they need it for — now they aren't insurable for a more cost-efficient policy.”

Translated, that means they're getting less bang for their buck.

Advisors recommend reviewing your life insurance policy at least annually, especially if you have a term policy. According to North, your advisors should be calling you on the anniversary of the policy’s issuance. But even if advisors reach out, it's no guarantee that clients will follow-up.  

Because of the association with death, life insurance doesn't often get the same consideration as RRSPs, says North — people tend to avoid thinking about it.

What often gets overlooked is that life insurance can be a useful tool for the living.

For example, taking out a life insurance policy boosts your net worth and makes you look more trustworthy to banks, says financial planner Susan Creasy, whose 31-year-old daughter used her policy to secure a mortgage on her first home eight years ago.

Taking out a life insurance policy boosts your net worth and makes you look more trustworthy to banks

“It's an asset. It tells them the kind of person you are — mainly that you're a good saver,” says Creasy.

It can also be an investment vehicle through the use of segregated funds.

And yet, 24% of millennials don't have life insurance, according to a 2015 survey by BMO.

Creasy says millennials need to reframe their view of life insurance.

“Insurance products are your foundation of planning, whether it’s term or perm. You need that base,” she says. “And it's not usually expensive when you're young — it could be $40, $50 a month.” North adds, however, that cost varies by individual, as rates are tied to the value of your policy.

To put it more bluntly, you’ll never be younger or healthier.

“Do it right the first time so you don’t scramble later on,” says North. “Sometimes something scares people and then it's often too late. The right time to buy it is when you don't need it — because when you need it, it's too late.”