According to the Canadian Life & Health Insurance Association, the average life insurance protection per household in Canada is $442,000, or about five times the average income. But how do you know whether you need life insurance or not?
The right need, the right time
If you’re wondering “When should I start thinking about life insurance?”, the answer is simple, at least on the surface: whenever you need it. As a general rule, this need will emerge once your income is required to support the standard of living of other people – usually a spouse or children. If you happened to die, life insurance would provide a substantial tax-free lump sum to offset the loss of your income. Life insurance could also be used to pay off a financial obligation after your death, for example a mortgage, line of credit or personal loan that you took out during your lifetime.
This is why most people wait until their late twenties, or even their thirties, before purchasing life insurance, i.e., once they are in a stable relationship, starting a family or buying their first home.
But there could be three good reasons for taking action even if these conditions have not been met.
The younger you are, the lower the premium
The first of these is that, all else being equal, the cost of a life insurance policy is usually lowest for young people, as we can see in the graph below.
By purchasing insurance early in life, you would be able to lock in a reasonable premium rate for many years. You might also think about getting a higher level of coverage, for a fraction of what it would cost you twenty years down the road.
The second reason is to guarantee your insurability. In fact, most life insurance policies are conditional on a medical exam. And the older we get, the more likely we are to develop health conditions, some of which could compromise our ability to get life insurance – or, at the very least, make it more expensive.
By getting life insurance coverage when you are young and healthy, you could guarantee your insurability right away.
Lastly, if you are not in a stable relationship or don’t have any dependents, there could be other reasons for purchasing life insurance. For example, some people simply don’t want to leave any debts – such as a student loan – to be paid by their estate. Others would like to save their loved ones from having to incur heavy costs for a funeral. And still others want to establish a legacy for the benefit of a favourite charitable cause, whether it be education, medicine, scientific research, human rights, or diversity and inclusion, for example.
All good reasons to consider life insurance, even if married life, children or the purchase of a house are not on the agenda.
Never too old, either
And while it’s never too soon to think about life insurance, it might well never be too late, either. The type of need, however, might be very different. It’s not unusual for people in their sixties to have accumulated substantial wealth and to no longer have any dependents, which greatly reduces their need for coverage. At that time, the tax benefits of life insurance would be a greater consideration, along with the powerful leverage that can result in bequeathing tax-free amounts that are larger than a person’s assets alone would provide.
This is why, starting around age fifty, financial planning and planned giving strategies often make use of life insurance, even if there is less need for protection and the cost is higher at that time.
Regardless of your age, there could be a multitude of reasons to consider life insurance. Of course, you still have to determine which type of policy would best help you reach your goals: term, whole life, universal life, participating?
Something to discuss with your advisor.
The following sources were used to prepare this article:
Actualis, “Do you really need life insurance if you’re sufficiently wealthy?”
CLHIA / ACCAP, “Canadian Life & Health Insurance Facts, 2021 Edition.”
Investopedia, “Best Age to Get Life Insurance.”
PolicyAdvisor, “Desjardins Life Insurance Review.”
The Ascent, “What's the Right Age to Buy Life Insurance?”
The Balance, “At What Age Should You Buy Life Insurance?”