Many people ask this question but the answer is far from simple. Every individual has unique circumstances and therefore there is no one answer that fits everyone. There are two types of life insurance – “if insurance” and “when insurance”.
“If” insurance is used to cover needs that have relatively short durations – typically 20 to 25 years or less. Needs such as Debt Elimination – don’t leave your heirs with debts to pay – mortgage, car loans, lines of credit, credit cards – you get the picture. If you have children, then both child and home care together with education funding come into play. All of these are usually for a defined period of fewer than 25 years unless you have a special needs dependent.
“When” insurance is available to cover those costs that will be around for 20 years and longer. Items such as final expenses in settling your estate, special needs, charitable bequests and lifetime survivor income requirements all fall into this “when” category since they never go away and usually increase in cost due to inflation if for no other reasons.
Needs such as continuing income for a surviving spouse, actually need some of both types of insurance. Some “if insurance” to provide income up to the spouse’s retirement age and “when insurance” for the rest of his or her life.
Our most insidious heir – the Canada Revenue Agency (CRA) – never relinquishes its’ hold on our financial legacy (unless we die completely broke) so “when” insurance is best suited to cover their claims.
What is “if insurance”? “If” you die within a specific period, the insurance is available. It is generally the least expensive type since the level of risk to the insurance company is constantly decreasing the longer we live. Available in terms from 5 years to 30 years – or to some fixed age such as 75, this is more commonly called term insurance. It gets its name from the fact the coverage is only in force for a specific period or term. Premiums increase periodically depending on the type of term insurance chosen.
So what about “when insurance”? This provides benefits “when” you die, regardless of your age – more often this is called permanent insurance or whole life insurance since it lasts for the whole of your life. It is more expensive than term insurance and the reason is the coverage never runs out, so it costs more. This type of insurance generally has level premiums and includes the option of increasing the death benefit each year so it can offset some higher costs and inflation adjustments.