Q: I’m single, debt-free and I don’t have kids. Do I still need to buy life insurance?
A: The short answer, if this is your situation, is no.
Life insurance is meant to help your family cope with the loss of income when you die. It provides a one-time, tax-free payment called a death benefit to your chosen beneficiaries upon your death, in exchange for regular payments, or premiums. The money can be used to replace your income, pay for funeral expenses, help care for dependants, etc.
For Canadians who are carrying debt and/or have dependants, life insurance is “kind of like a safety net,” says Chris Merrick, founder and owner of Merrick Financial. “If you don’t have it, you have to be really sure that you have enough assets to cover everything you need.”
Merrick explains that there are two types of life insurance: term and permanent. Term life insurance covers you for a set term (10, 15, 20 or 30 years) and is a lot cheaper and more straightforward than permanent life insurance, which offers coverage for your entire life. Merrick says permanent policies tend to be very expensive and complicated.
Permanent life insurance is also oversold, Merrick says. Insurance companies often sell permanent policies as investment vehicles, since you can overcontribute to them and build up a cash value. These policies are often sold as “be your own banker” and “infinite banking,” Merrick says, adding that you’re actually much better off maxing out your RRSP or TFSA.
Ultimately, paying an expensive premium if you already have enough saved for final arrangements and estate taxes simply doesn’t make sense. That’s why there are a few circumstances where you don’t actually need to purchase a life insurance policy.
First, if you’re single with no dependants (which means no one depends on your income), you do not need life insurance, Merrick says.
You also may not need life insurance once you retire. Merrick recently worked with a retired couple who decided their term life insurance policy was too expensive. “Typically, the policy rates really spike when you get to your 60s,” he says. “They decided that it just wasn’t worth it.”
Finally, you can skip life insurance if you have lots of savings and assets, Merrick says. “Some people call that self-insurance, where what you’ve got is easily going to cover your final expenses and taxes, and there’s lots of money left over,” he adds.
If you want to make sure you have enough set aside to cover final arrangements, consider prepaying for your funeral.
You may have a life insurance policy through your employer. In this case, Merrick says, you should figure out the total amount of life insurance needed to see if you need a top-up. For example, if you have coverage up to $400,000 at work but you need $1 million, you could purchase a private policy for $600,000.
Money Coach is a weekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at [email protected].
