Are you over insured?
When major life events happen such as buying a house, getting married, or having kids, this often triggers a need for insurance. What you might not realize is that some life events can reduce the need for insurance.
The other day I got asked the following questing:
"When I had kids, I purchased insurance to protect my family, now my kids are all grown up and moved out, and our house is paid off. Do I still need all this insurance?"
In this situation the need for insurance was to protect their family in case someone dies. They didn’t want to leave their kids with the burden of their mortgage, or leave their loved ones struggling to get by. But now, that need is way less. There is no more mortgage, the kids are no longer dependent on their parents and their household might be able to survive on one income if they really had to.
Good rule of thumb: Once a year, you should give the amount and type of insurance a think. We can help by completing an insurance review to make sure your insurance is still fitting your needs. Whether you are going through a major life event, or your premiums are getting too expensive, getting a second opinion can never hurt.
How do you tell if you are over-insured?
The purpose of life insurance is to protect your loved ones in the unfortunate case you pass away. You need to ask yourself does the amount of insurance I have cover all my debts? And if you own a house with a partner, you also need to ask yourself, does the amount of insurance you have cover the running of a household? You want your partner to be able to maintain the same quality of living if you pass and you defiantly don’t want them to have to sell the home because they can no longer afford it on a single income.
For example, a single couple with no children owning a $700,000 2 bed 1 bath condo in Downtown Toronto with a 30-year mortgage with a 5-year fixed rate of 5.95% here are some of the costs of ownership:
Owning
Mortgage: $3,314
Condo fees: $500
Utilities: $150
Property Insurance: $40
Maintenance & repairs: $450
Property tax: $350
Total: $4,804
By buying $700,000 in life insurance, your condo would be paid off if you were to pass away. However, that still leaves around $1,500 in monthly expenses that might become difficult to maintain with only one income.
If you want these expenses covered for 5 years while you get back on your feet, that will require another $90,000 in life insurance.
This is why mortgage insurance is extremely important. And we recommend using life insurance as mortgage insurance because creditor insurance will only pay off the debts, but life insurance will pay off debts plus those additional living costs that your faced with.
You might also want some additional insurance to leave behind for your family or to cover the costs associated with your funeral.
What to do if you are over-insured?
There are different ways to reduce your insurance depending on the type of insurance you hold.
Term insurance
Term insurance is often bought when you have a temporary need for insurance or when the budget is tight. Term insurance covers you for a specific term (10 years, 20 years, or 30 years). When the term expires, the insurance is automatically renewed on a yearly basis at a much higher rate. To reduce the amount of term insurance you can:
Let it expire
If you want your insurance to expire at the end of the term, you need to notify your insurance agent. This is the simplest way to reduce your insurance coverage if the term insurance is no longer needed. The key is to make sure not to cancel insurance you do still need. Let us help figure out if there is any 'extra'
Adjust your coverage
If you want to keep some term insurance but just not all of it, you can reduce the death benefit. You can also look at only converting a portion of it into permanent insurance so that the insurance grows like any other asset.
Permanent insurance
Permanent insurance is bought when you have a permanent need for insurance. As long as your premiums according to your contract, permanent insurance lasts as long as you live. If throughout your life you want to reduce the amount of permanent insurance you hold, there are a few options.
Reduced Paid-up
Permanent insurance comes with an option to buy paid-up insurance with dividends. It is exactly what it sounds like, you get a little more insurance without having to pay more in premium. The reduced paid-up insurance is a method to continue a portion of your coverage without having to pay any further premiums.
Cancel your coverage
If you just want to cancel your permanent life insurance, that is an option too. By canceling your policy, you are still entitled to receive the cash value from your policy. However, you need to contact your insurance agent to cancel the policy, if you stop paying premiums, the premiums will be taken out of the cash value and the policy will continue until no cash value remains. Any cash value that is withdrawn will be taxed so make sure you know how that will affect you.
How can we as a company help you to maintain your over-insurance checks?
If you are not sure if you're over insured or not that’s why we're here. We are experts in making sure all of clients are properly insured.
If you want to figure out if you are over insured or not, schedule a free insurance review.
Our team will conduct a needs analysis to determine how much insurance you need. We will conduct these annually to keep track of your life changes and make sure your insurance continues to fit all your ongoing needs.
During the insurance review we will look at all your liabilities including your mortgage, car loans, and any other debt. We will compare this to your assets, your income, and your future goals. This will help us determine the correct amount of insurance that you need. We will then compare this with the insurance you have and figure out if you’re over-insured, underinsured and answer any questions you may have.
written by Katie Sivertson, Insurance Advisor, Doyenne Insurance and Estate Planning Ltd.