Do you really need life insurance until the end of your days? | dollars and cents

Fabien Major is a financial planner and host of the popular personal finance podcast The plan. He has been a wealth management advisor since 1998.

Diane, a reader of our articles from the section dollars and cents, wonders if you really should keep a life insurance policy for the rest of your life. At the age of 80, she has, so to speak, only four expenditure items left: rent, groceries, medication and insurance. And her life insurance, which she has had for more than 40 years, costs her as much as her rent, she points out!

Many people wonder, like Diane, if it’s worth continuing to pay premiums at this age. And many also say to themselves that, as long as they have paid for so long, they might as well continue to “recover” what they have paid. Let’s see if this logic holds up.

As we get older, we observe that after decades of cover, the premiums are very high: from the age of 60, they skyrocket. While the insurance itself is less and less justifiable. Especially in a context of high inflation and economic slowdown. If we have difficulty paying the bills for insurance that, in fact, will benefit others upon our death, we must quickly speak to its beneficiary or beneficiaries. After all, when we take out such insurance, it is to help our loved ones.

I have seen exceptional cases, including this one, where the insured has paid a total of more than 40,000 dollars in premiums since the subscription of his contract, while his capital at death is no more than 45,000 dollars.

Needs in line with reality

When you set the policy amount, your children may still be very young. In order not to leave them in need in the event of your death, each budget item has been taken into account. And it goes up quickly when you have a small family: the mortgage, car loans and credit card balances, home maintenance costs and tax bills, income replacement, tuition and other costs. subsistence, funeral expenses…

A family may, for example, need $700,000 for a term of 10, 20 or more years to cover all these expenses. From this amount, we subtract the assets that could be liquidated to meet these needs, such as bank savings, TFSAs, RESPs, RRSPs. We must also take into account the insurance in force (individual and collective) and the sale of real estate if necessary. Don’t forget to include a single payment of $2,500 to the surviving spouse if you have contributed to the Retraite Québec plan for at least 10 years.

From $700,000 at the start, it is possible that the net need is in reality only $100,000.

When you reach 60, the children have left the nest and the family members are independent, insurance needs melt away like snow in the sun. There may remain at death a small mortgage, tax payable if the heirs must liquidate RRSPs and RRIFs and if we bequeath real estate to them that is not considered our principal residence.

Unless you have a huge desire to leave money as an inheritance, I don’t see why you should keep significant insurance coverage after age 60. Especially considering the dramatic jump in policy costs at this age. For example, a 40-year-old male non-smoker will pay an annual premium of $503 for 20-year term insurance covering $500,000. For the same insurance, a 60-year-old man will have to pay $4,335. Or 763% more. (These examples reflect the best rates in the Canadian market obtained with the Quote-On-Tab app in January 2023.)

To Diane, as to other people in her situation, I suggest talking to the counselor in charge of the file. He will be able to reassess your need for insurance and above all explain to you in a transparent manner the advantages and disadvantages of keeping your policy or abandoning it.

To pay funeral expenses?

Some will want to keep their insurance to avoid leaving their loved ones with the bill for their funeral expenses. But from there to maintain a large life insurance? A survey of the Corporation des thanatologues du Québec conducted in 2018 among its members estimated the average funeral costs at $5,700 in commercial establishments and around $4,000 in cooperatives. These numbers have obviously increased since then, not to mention the addition of options. But if you are able to leave more than $10,000 in net estate cash, you can consider having your funeral expenses covered. Here again, therefore, it is not useful to keep a large life insurance policy.

If you are under 60…

If your budget is too tight and you’re juggling the idea of ​​giving up your life insurance, I suggest you contact your financial security advisor to discuss your policy options. You could lower the costs by reducing the face amount. If your policy comes with cash values, these could ease the burden. The premiums could be taken from it automatically and in some cases you could be completely released from payments.

If no solution allows you to breathe, discuss it with your loved ones. I occasionally see families splitting the insurance bill, when it’s worth it. For example, when life expectancy is limited and the death benefit will certainly exceed the annual premiums.

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