They call it “nickel and diming” for a reason. A little bit of money lost here and there seems innocuous enough, but then it starts adding up over time and you’re left with a hole where your savings used to be.
Make no mistake, life insurance is a valuable financial tool in almost any context. But there’s a number of ways your life insurance could be eating into your wallet – and the problem is completely fixable.
#1: You Don’t Own a Plan That Meets Your Needs
If you owned a 20-year mortgage, would you buy a 10-year term life insurance plan, a 20-year term, or insure yourself for life?
Hopefully, the answer is simple: you pick the plan that matches your needs. And the same goes for seniors looking for life insurance before or during retirement – you pick a plan that best reflects the costs you expect for the length of time that matches what you’re willing to cover.
Need is fairly simple to divine: you’re largely looking at final affairs coverage and potentially an amount to allocate your estate and your will properly. You can put an exact number on that, and a financial advisor can do that for you. But how do you know if you’re picking the right length of coverage?
There’s no exact science to it, but you should always be buying a product that you can manage payments for, even when you’re 80 years old. A common problem among Canadian seniors buying life insurance is to look at solely term or solely whole life insurance without considering what the costs will be down the road.
A financial advisor can point you in the right direction, but a useful rule of thumb has always been:
- If you’re focused more on debt and final affairs management and cost is a big concern – look at term life insurance first.
- If you can bear the costs and you’re looking for a tax-friendly investment strategy – whole or universal life could be preferable.
#2: You’re Overinsured (A particularly real problem for seniors!)
Far be it for an insurance company to say “you have too much life insurance”, but it’s a very real problem where a lot of Canadian seniors are paying 100% of a plan for the 10% they realistically need.
It’s not a mistake of buying too much at purchase. If you insured yourself for $200,000 at age 40 with a whole life plan, you probably needed that $200,000 at that time and place in your life. However 20 or 30 years down the line, you’ve potentially secured a livable income and paid off that debt and you need a fraction of that just for funeral costs.
There’s a risk to being overinsured, and the consequences all lie at the behest of your wallet. Life insurance, under all and every circumstance, should remain affordable relative to your income – or it’s not worth owning in the first place.
If you own a policy that you need to scale down or transfer into a lower-cost alternative, you need to speak to a financial advisor as soon as possible to open up some of that fiscal wiggle room for yourself. There’s no sense and no benefit to paying for a benefit that isn’t serving at least some purpose.
#3: You Didn’t Need to Avoid The Medical Exam
The fastest growing life insurance product on the market, No Medical Life Insurance has been a great driving force in providing more inclusive financial planning and more convenience to Canadians over 50 find options on the market where, twenty years ago, they would be politely shown the door.
But as highly marketed and highly alluring the prospect of avoiding a medical exam is, you should consider the traditional tried-and-true life insurance market as well. For one, it’s cheaper to the tune of as little as half the cost of No Medical Life Insurance, and as much as a sixth of the cost of a Guaranteed Issue life insurance plan – if you’re in good health.
The benefit of no medical exam is always there to offer a lower-cost option to individuals who would face rating or decline along traditional avenues. But if you’re able to pass a medical exam, you’re saving a lot more money by going through with the process – invasive as it may be.
#4: You’re Not Being Tax-Conscious
If two things are certain in life, it’s death and taxes. Since life insurance plans for one, why can’t it address the other? Life insurance is rare among financial tools in that it’s paid to beneficiaries tax-free. And that isn’t the only tax-advantaged use of life insurance.
You can also use life insurance as a tax-deferred method of saving, similar to the general idea of an RRSP. Usually contained in plans with accumulating dividends such as whole life insurance or universal life insurance, these plans let you “overpay” into the policy which are taxed on withdrawal.
While primarily of a benefit to wealthier insured, this benefit still can add up if it’s purchased at a young enough age. Of course, a financial advisor can help you chart a realistic plan for tax-advantaged growth if you elect to invest in this way.
#5: You’re Not Reviewing Your Policy Regularly
The greatest mistakes are mistakes of neglect. And while life insurance tends to be the longest-living investments in that they tend to mature over decades and not years – it’s important to stay up to date with your life insurance on an annual basis.
By taking a few hours out of every year to review your policy with an advisor, you’re not just putting aside some long-lived investment plan for you future. You’re laying the framework for a financial plan that’s going to perform better and save you money today while budgeting more aside for the future.
When you’re ready to stay up to date with your policy and start saving more on your life insurance, we would be happy to work with you.