Changing the shingles on your house is a necessary fact of life for home owners. As we are preparing to change ours next year, I think about what other fun things we could do with that money. But I know that if we get a bad enough rain storm and the roof is not in good shape, we will be in for much more expensive repairs inside of the house.
The analogy of changing the roof on your house is a useful one when considering the purchase life insurance as you get older. The question is, do you need life insurance as you are entering perhaps the later stages of your working life?
What Is Life Insurance For?
The primary role of life insurance is to protect your financial life against a low-probability, high-impact event. Provided that you are young and in reasonable health, there is a very low probability that you will pass away inside of the next 10-20 years. But the impact of that event, if it occurred, would be catastrophic to your family finances.
For most people who are early in their careers, their largest asset by far is the income that they haven't earned yet. This is also known as your "human capital". For young people, the loss of 30+ years of future income can be an enormous number. You can imagine the impact that might have on a family who has a new house with a mortgage payment, retirements not yet saved for, and kids' education costs yet to be paid.
As a result, it is simple to demonstrate the importance of life insurance to a young person.
But, what if you already have been paying life insurance premiums for 20 years? What if you are looking at your renewal premium notice in the mail and it has gone way up? No doubt, you can do some quick math to calculate how much you have been paying in insurance premiums over the last couple of decades. Naturally you will wonder - do I still need this life insurance? What else could I be doing with the money that is going towards those life insurance premiums?
Do I Still Need It if I'm Over 50?
This is entirely dependant on your specific situation. A financial planner can model the impact of a lost income on your long-term financial plan and help you determine how much you need. But at a high level, here's a simple way to think about it.
Simply ask yourself, what obligations would still be unfunded if I (and my income) are gone tomorrow?
Some common obligations that people still have in their 50's include:
- Monthly Bills - If you are married and will leave a spouse behind or if you are caring for a loved one, the monthly bills will still need to be paid if you are gone. If you and your spouse are not yet financially independent, meaning you don't have enough money saved up that your income could disappear and your spouse or loved one could live solely on your own savings and guaranteed income sources like a pension, CPP, and OAS, there is a gap here that will need to be filled.
- Debt Payments - According to this 2019 survey from SunLife, 74% of working Canadians and 52% of retired Canadians have some form of debt including credit card debt, line of credit debt, and mortgage debt. Funds may be needed if you have debt to pay.
- Retirement Savings - If you are married and still saving for retirement, your spouse may find themselves short on retirement savings if you pass away tomorrow.
- Kids' Education - Your kids may be in the midst of their post-secondary education. Even if you have saved diligently to help them with the cost, you may still be funding a portion of these through your regular income.
- Final Expenses - Funeral, burial, and legal costs will arise immediately when you pass away. If you don't have sufficient reserve savings set aside, life insurance can help fill this gap.
If you have any of these obligations, you may still need some life insurance.
What Else Could I Be Doing With These Premium Dollars?
If you've gotten this far and you're thinking "OK, I can see that I may still need to hang onto some life insurance, but how much is this going to cost me? And, what else could I be doing with that money?
The cost of $1,000,000 of 15 year term life insurance coverage for a healthy 50 year old female is about $1,500 per year. The same amount of coverage for a healthy 50 year old male is about $2,200 per year. This is not a recommendation, this is just an example to help me illustrate a point.
A question that I have been asked a few times is - "OK, what if I just invest that extra money every year? Where do I end up after 15 years?"
Assuming a 5% after-tax rate of return, if the 50 year old male invests $2,200 at beginning of every year, he will end up with $49,846.48 at the end of 15 years. Assuming that he doesn't pass away during that 15 year period, he may look at that foregone return on the annual premiums as a missed opportunity. After all, if a term insurance policy comes to term and is cancelled, there is no refund of premiums or benefit paid to the policy holder.
But this is nowhere near the point.
The purpose of the life insurance is to protect his spouse against his passing away and the loss of his future income over the next 15 years, as unlikely as that may be.
In this case, the life insurance death benefit pf $1,000,000 is exponentially better and more impactful than any reasonable investment that he could otherwise make with that $2,200 annual premium payment.
"But My Spouse Will Just Adjust Their Lifestyle"
You may still be hesitant to seriously consider life insurance at this point. You may say to yourself, "my spouse will simply adjust their lifestyle if I pass away."
Absolutely, yes this is possible. I have had couples together explain to me that they are prepared to change their retirement plans and adjust their lifestyles if one of them passes away unexpectedly. A couple of thoughts on this.
1. You must, in a clear-eyed and deliberate fashion, define what that will look like and run the numbers to make sure that change is feasible. And then consider...
2. You will have a hard time being objective about how you will react and how you will feel if your spouse is no longer here. It is highly possible (dare I say, probable) that you may be over-estimating your spouse's ability to adapt to major financial changes in their life while they are dealing with the emotional toll of your passing. I have had the solemn responsibility of sitting with grieving widows and widowers and I can tell you first-hand that making major life changes like a house downsizing, the sale of their cottage, going back on a commitment to fund a child's university education, or a reduction in their retirement income, are the very last things that they would want to confront in that difficult time.
I get it. Paying life insurance premiums is not fun, especially if you are entering the back half of your career and you have other things that you would prefer to be doing with those dollars. But just like you need to replace the old shingles, if you still need to offer protection for your financial house, it is worthwhile to make sure that you stay properly protected with life insurance.
If you would like to talk about your situation to determine whether you have a need that may need to be filled with life insurance, I'm glad to help.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by Mark Walhout, an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.
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