Life insurance has been called the foundation of net worth planning. If you have a spouse or children, the initial stages of your financial plan should include adequate life insurance coverage.
There are two types of life insurance You can either buy pure term insurance coverage, or a plan that can last a lifetime with various investment vehicles that can gain value and enjoy tax advantages while the policy remains in force. You can also mix pure term insurance with an investment in one policy, with certain types of whole life.
The cost of lifetime insurance coverage is higher. Yet the tax-free death benefit can solve estate-planning problems such as paying an estate's tax liability on capital gains.
However, if you can't afford the premium for lifetime coverage, consider term insurance or a combination of both. Term plans are quite affordable.
Ask your advisor to do a capital needs analysis You may want to replace the income of the life insured—either yourself or your spouse. It is easy to calculate the capital needed over any short or long period of time in any situation if the life insured were to die. There are many professional calculators that allow advisors to prepare accurate life insurance assessments.
Review your life insurance during these life stages As we journey through life, our circumstances change dramatically. So do our needs for life insurance. It may be time to review your life insurance and verify beneficiaries, policy amounts, any riders associated with the plans. As you evolve financially, so do your life insurance needs.
When you have a young family When you are newly married and starting a family, life insurance is purchased to provide tax-free capital in case one of the parents should die. A young mother would not be forced to go to work, reduce her lifestyle, or leave her children to be cared for by others.
When your children are going to college When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child's first car, or pay him/her an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to shortage of funds.
When your estate will face a large tax bill As you approach retirement, you may have accumulated assets that will be taxed on capital gains: such as a cottage, a business, large equity mutual fund holdings, or a stock portfolio. Life insurance can help pay the income tax due in your estate. This can include paying for taxes on remaining RRSPs or RRIFs, as these funds are fully taxable to the estate (where there is no surviving spouse or dependent child). It can also pay off large business debts that may be left as an ongoing liability, weighing on a surviving spouse's financial security.