When should I buy life insurance?

For some reason, there seems to be a widespread misconception out there among many young Canadians that life insurance is for “old people”. This error couldn’t be further from the truth, and falling prey to it can wreak havoc with an otherwise sound financial plan.

In order to understand when it is best to buy life insurance, one needs to first think about how the product is best used. While there are several niche uses for specialized life insurance products, the main idea is to protect your loved ones from undue financial hardship should the worst case scenario occur. Because our own mortality is a distasteful and potentially awkward topic, many of fail to think about just what our families’ financial needs might be should we no longer be there to provide for them. This is especially true for single-parent families, or families in which one parent is the primary breadwinner. Life insurance is meant to replace the paycheque you would have been bringing home, or to replace the cost of hiring someone to carry out the tasks you normally complete.

Risk protection when it is most needed

Once you consider the logic behind life insurance, it becomes apparent that it should be a product primarily aimed predominantly at younger people, and is most needed by young parents. Young people have the most variables to take into account, such as the fact that they are still relatively early in their lifetime earnings expectations (and consequently have far more earning potential than older people), likely have fairly high relative debt levels, and often have young children that will chew up a large portion of the budget for years to come. Young parents and young people in general have the most to lose if an uncommon tragedy occurs – and have the most vulnerabilities to insure against.

When you buy life insurance in Canada, it’s important to consider what needs your family might have immediately and down the road. What debts do you owe? What lifestyle is your family used to living? How much income would they need to continue living in a similar manner? What earning potential does your significant other have? Would they be able to go work? These are personal questions you should discuss with an insurance professional.

As you get closer to retirement, your financial vulnerability to a tragic event lessens, as does the need for a large life insurance policy. By the same token, if you are a single person with no debt and no one depending on your income to help support them, then you have very little need for a large life insurance policy right now.

Other times life insurance might come in handy

In some cases, life insurance might be appropriate for scenarios other than plain income replacement. Sometimes individuals choose to carry enough life insurance to cover the costs of capital gains on a cottage that would be incurred when the cottage is passed down to their children. In other instances, life insurance can be a tax-effective way to leave an inheritance to charitable causes or loved ones.

While life insurance is often marketed as an alternative to traditional retirement vehicles, it’s important to read the fine print. In many cases life insurance is purchased as an investment plan instead of as what it was always meant to be: protection against the loss of a family’s major income source. It is generally a good rule of thumb that insurance decisions should not be made with investments in mind.