In today’s dynamic economic landscape, many Canadians face rising inflation and escalating house prices. This has, unfortunately, led to some hesitation toward insurance. This is often true for younger individuals, who are navigating increasing debts and may not fully realize the vital role that life insurance can help play in ensuring financial security for their families, should they pass on. As a result, many are not adequately protected. Underinsurance is a common yet overlooked problem, leaving individuals and their families vulnerable to financial hardship. We delve into the various causes of underinsurance and actionable strategies to avoid it.
Underinsurance refers to insurance coverage that is inadequate to meet dependents’ financial needs after the policyholder’s death. A Canadian Life and Health Insurance Association (CLHIA) survey showed that one in three Canadians has no life insurance, and over half of those insured are covered for less than $100,000.
It is worth noting that the financial needs of a family can vary significantly based on numerous factors, such as the number of dependents, outstanding debts, and the cost of living in your region. Young parents represent a particularly susceptible segment of society. Balancing financial obligations with the needs of a growing family is a common struggle, making it challenging to prioritize insurance coverage within their budgets.
Addressing underinsurance is crucial to helping avoid financial hardship for loved ones. It requires careful assessment of your financial situation, considering dependents’ potential needs, and securing adequate life insurance coverage.
Factors Contributing to Underinsurance
Understanding how life insurance works is crucial for selecting a policy that adequately covers your needs. However, the complexity and variety of policies and benefits often lead to underestimating coverage needs or selecting inadequate policies.
For instance, term life insurance offers coverage for a specific term (e.g., 10, 20, 30 years) and is generally more affordable, whereas permanent life insurance provides lifetime coverage and may include a cash value component. Unfortunately, many people are unaware of these differences and choose policies misaligned with their long-term goals. Policy riders, additional benefits that customize coverage, are also often overlooked. A critical illness rider, for example, provides a lump sum payment upon diagnosis of a specific critical illness. Not knowing about such options leads to missed opportunities for tailoring coverage to particular needs.
Some people hold off on getting life insurance because they think they don’t need it yet. It’s easy to fall into the ‘it won’t happen to me’ mindset. Others believe that workplace-provided coverage is sufficient. However, the coverage provided by employers is often basic and may not be enough to cover all the financial needs of your dependents. Life is unpredictable, and when securing a policy sooner, the more affordable it will typically be.
Some individuals may hesitate to purchase life insurance due to budget constraints or having other financial priorities. It’s not uncommon for people to focus on immediate financial obligations, such as paying off student loans or saving for a down payment on a house, and view life insurance as a lower priority. While it may seem like an additional expense now, it can provide a safety net for your loved ones and be critical for their overall financial health and security.
Life insurance is not a ‘set it and forget it’ kind of deal. Your coverage needs can shift due to several life events, like tying the knot, welcoming a new family member, or taking on a hefty loan. If you don’t adjust your policy to reflect these changes, you might end up underinsured.
Selecting an inappropriate policy, like choosing term life insurance when permanent life insurance is more suitable, can result in inadequate coverage. For example, a term life insurance policy expiring at 60 may initially seem sensible but fails to consider potential ongoing financial obligations, such as a mortgage. While term life insurance is more affordable, short-term, permanent life insurance, which provides lifetime coverage, may be more suitable for anticipated ongoing financial obligations.
Consequences of Underinsurance
Choosing the right coverage amount is crucial. If it falls short of meeting the financial needs of dependents in the unfortunate event of the policyholder’s passing, they may find it challenging to maintain their current standard of living. Imagine a family where one parent is the primary income earner, and the other takes care of the kids. If the primary earner passes away and the insurance payout isn’t enough to cover the mortgage, education costs, and childcare, the family might have to make significant adjustments.
If the life insurance payout does not cover all your loved ones’ expenses, they may be forced to resort to less desirable means to make ends meet. This might involve taking out high-interest loans or relying on credit cards to cover everyday expenses, which can lead to a cycle of debt that is difficult to escape. Accumulating debt can lead to a lower credit score, making it more difficult and expensive to borrow money in the future.
When the financial protection is inadequate, the surviving loved ones may face tough financial decisions and be forced to make sacrifices they wouldn’t have had to consider otherwise. For instance, they might have to sell a family home, delay educational pursuits, or forego starting a business or other investments.
Solutions for Underinsurance
Make it a habit to review your life insurance coverage annually. Whenever you experience a significant life event, such as getting married, having a child, buying a house, or taking on substantial debt, you should reassess how it can impact your coverage needs.
Permanent life insurance policies offer coverage for your entire lifetime and come with added financial benefits like accumulating cash value and tax advantages. Although these policies typically have higher premiums than term life insurance, they can offer more comprehensive long-term financial protection. Additionally, the death benefit provided to your beneficiaries is generally tax-free, making it an efficient way to transfer wealth to the next generation.
List all your current financial obligations, including mortgages, loans, and any other debts. Also, consider future financial needs, such as your children’s education or your spouse’s retirement. Compare this with your current coverage and savings to see if there is a gap. Consider how much of your income needs to be replaced to maintain your family’s current standard of living. A common approach is to aim for coverage that is 7-10 times your annual income. In certain situations, augmenting your current coverage with additional policies may be necessary.
422731 CAN (11/23)
- 1 Foresters and Canada Protection Plan (CPP), and their employees and life insurance representatives, do not provide, on Foresters behalf, financial, estate, legal or tax advice.
- 2 Insurability depends on answers to medical and other application questions and underwriting searches and review.