Lillian Huang sees it all the time: the family who scrambles to buy term life insurance when their children are very young, then wonders what to do when the term is up.
“When you’re working with young families, it’s catastrophic if one person were to pass away,” says Ms. Huang, a life insurance specialist and certified financial planner in Calgary. “But when the kids are older and more independent, then you likely don’t need that same level of coverage.”
Term 10 or Term 20 life insurance can be affordable options when people need coverage but don’t want to pay steep premiums. Thus, these options are popular among younger couples and parents who are earlier in their careers, have lower incomes and carry big mortgages on their homes.
When that term insurance runs out, clients need to consider factors such as the state of their health and finances, and whether they still have dependents. At that point, they can decide how much coverage, if any, is still needed and which insurer will offer the best price.
“People may choose to cancel their life insurance coverage if they determine it is no longer needed,” says Brian So, a life insurance advisor in Vancouver. “This could potentially free up resources they can then direct toward various financial goals, such as investing, saving for a trip, or prioritizing debt repayment.”
Ultimately, he says, the choice depends on the client’s financial circumstances and long-term goals.
Which coverage is best?
When term insurance runs out, Ms. Huang says it’s best to take stock of the situation. Does the individual or family still have steep mortgage payments on the primary home or a cottage? Are they in debt? Are they planning to have another baby? Do they have any health conditions that would increase a life insurance premium dramatically?
Nicole Marques, an independent insurance advisor in Toronto, also says clients should find out how much life insurance they have as part of their group benefits package at work.
In most cases, clients opt to purchase some life insurance, but less than they previously required, Ms. Marques says.
“Maybe it’s now $500,000 in coverage versus $1- to 2-million,” she says. “It’s all about re-evaluating your needs.”
Ms. Huang says many large insurers offer automatic renewals of term life coverage. That can be a good option if the clients are not in good health, as no medical questionnaire is required.
But “renewing often leads to a significant increase in premiums, ranging from three to 10 times the initial cost,” Mr. So says. “This can be a deterrent for some people.”
In cases in which a person is in good health and can pass a medical successfully, they should work with an advisor to secure the best price, Ms. Huang says. “It’s always better to shop around.”
Considering permanent life insurance
Another option is to choose permanent life insurance at the outset, a type of coverage that never expires even if a person’s health status changes.
Permanent life insurance comes in two forms: whole life and universal. While both products are for life and have a cash component (a portion of the premium that is savings and grows in value over time), whole life offers a guaranteed death benefit while the death benefit in universal life insurance may increase or decrease depending on the types of investments in the account and how they perform.
As permanent life insurance is considerably more expensive than term life insurance – five to 15 times more expensive, according to PolicyMe – it might not be a good fit for a client with a heavy debt load or a job that’s not stable, Mr. So says.
“And Canadians are very price sensitive,” Ms. Marques adds.
She says those considering buying permanent insurance should do so at the youngest age possible and bring the premium down by adding term riders. For example, she says a client might buy $25,000 in permanent insurance coverage with a $1-million term rider that ends at the 10- or 20-year mark. For a higher premium than simple term insurance, the individual can enjoy the benefits of both types of coverage.
Even though each situation is different, if someone depends on their income, “some insurance is better than no insurance,” Ms. Marques says.
“We don’t know when we’re going to die.”