When to buy life insurance? Sooner rather than later
You can think about life insurance anytime, but you can only do something today. That’s what you gain by thinking about insurance sooner. You don’t need to act now, but you can prepare.
Life insurance is cheaper when you’re younger, but without any assets to protect or dependents to support, there’s no need for life insurance when you’re young. Generally, we start thinking about when to buy life insurance when we have a mortgage and kids. Here are a few tips and thoughts to help you make your decision.
Lock in your insurability
You can get insurance anytime you want, but first, you must qualify. Since we can’t tell what’s going to happen to our health, waiting isn’t in our best interest. Getting term life insurance when you’re young is a good way to lock in your insurability. However, for budgeting reasons, you may select a solution you find suboptimal — say Term 10 when you prefer permanent (term is coverage over a defined period of time, permanent life insurance lasts your whole life).
Since you can convert to permanent later regardless of your health, you don’t need to stay uninsured until you can afford permanent. Term life is inexpensive compared to permanent so it’s easier on the wallet. You can also extend term life if you choose to stick with a term policy, but you’ll need to requalify with medical (and it’ll cost a bit more).
Know your rights
Term life insurance usually gives you the right to convert to permanent insurance regardless of your health. This option allows you to go up to age 85, depending on your provider. So, if you don’t check sooner, you may find you’ve lost this option. You can still apply for new permanent life insurance but only if your health allows, but it’ll cost a fortune. However, It doesn’t make sense to buy life insurance if you have no debts, your mortgage is free and clear, and your kids are in the working world.
The only reason to buy life insurance when you’re older without debts is to protect the generational wealth you’ve built. At 65, you can buy a term 10 policy (a policy that lasts 10 years) which will help cover the taxes of the estate transfer. The CRA wants their capital gains, but a life insurance payout is not taxable.
Avoid renewal shock
Term life insurance allows you to renew your coverage at the end of each term until a maximum age. This seems good until you look at the renewal premiums — then they jump sharply. If you buy Term 10 and realize you need protection for longer, don’t wait until renewal time; explore your options sooner.
Let’s use an example.
A 30-year-old male in normal health will pay the following for a $500,000 term life policy:
- 20 year term costs ~$32/month
- 30 year term costs ~$57/month
- 40 year term costs ~100/month
It shows, in 10-year increments, the price difference over time.
The same policy for the same person with permanent insurance is over $300 per month.
Let’s change our applicant’s age to 40 for the same $500,000 term life policy.
- 20 year term costs ~$48/month
- 30 year term costs ~$90/month
- 40 year term costs ~160/month
At 50 years old, applying for a 20-year term with a benefit of $500,000 and you’re looking at about $130 per month.
To recap, a 20-year term policy worth $500,000 will cost:
- 30-year-old ~$32/month
- 40-year-old ~$48/month
- 50-year-old ~$130/month
Makes sense to buy life insurance when you’re young.
The right beneficiaries
As your life changes, you may want to change who gets your death benefit (called “beneficiaries”). Examples include:
- You have a different spouse
- You adopted a child
- One child might need more financial help than the others. The reason could be a disability or vastly different incomes.
It’s arguably why it’s a good idea to stay in touch with your life insurance broker, so you can make these changes easily.
The magic of compounding
Permanent life insurance with a cash value — whole life or universal life — lets you take advantage of compound tax-sheltered investment growth. Albert Einstein called compounding a mystery of the universe. More magic happens the longer the tax-sheltered growth occurs. The sooner you start, the more years you have.
Know, there is no “investment” portion in a term life policy. But again, it’s much cheaper.
Adjustments
Your situation will change with time. You may need:
- More coverage: maybe you’ve added a mortgage or have more children
- Less coverage: maybe you’ve paid off your mortgage and your children are now independent
- Additional coverage: you might need coverage for a partner or for the risks of disability or a critical illness
You may be able to make changes to what you have or buy something new. It’s important to read the fine print because it’s subject to your insurability.
Typically, you can increase coverage with medical evidence. Decreasing coverage is also smart if you have a smaller mortgage and a bigger RESP, but it can’t go lower than the minimum. Usually, the minimum policy is $100,000, Empire Life you can go down to $25,000.
Depending on your provider, though, they could refuse. There’s a difference between contract wording – a guarantee, and administrative practices – the current rules. Speak with your insurance broker about what changes you might want to make later in life. Think about your policies holistically.
The bottom line
Waiting will cost you more because you’ll be older and your health may have changed. Thinking about life insurance sooner gives you more options.
Get a personal, no obligation,life insurance quote now.
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