What is insurance Part 1

There is a general distrust and misunderstanding within our society of the benefits of life insurance. This lack of understanding often leads to misconceptions, underinsurance, and missed opportunities for long-term financial planning.

The confusion is understandable. The topic forces us to confront our own mortality, and the industry itself can be complex, with a variety of products and sometimes opaque jargon. As a result, many people either avoid the topic altogether or hold onto common myths.

Here are a few most frequently misunderstood benefits of life insurance:

Insurance is just a “death benefit”

The biggest misunderstanding is that life insurance is solely a “death benefit” – a lump sum paid out to beneficiaries upon the policyholder’s passing. While this is its primary function, many modern policies offer “living benefits” that can be accessed during the policyholder’s lifetime. These can be triggered by a terminal, chronic, or critical illness, providing crucial financial support during a difficult time.

I have had the privilege to deliver two (2) tax-free cheques to clients who survived major critical illnesses. I must tell you it was well received, appreciated and provided maximum benefits to aid in individuals’ full recovery.  

Insurance for income replacement

While replacing lost income is a cornerstone of life insurance, its applications in financial planning are far broader and often overlooked:

• Debt Elimination: A life insurance payout can be used to settle outstanding debts, such as a mortgage, car loans, or credit card balances. This prevents the burden from being passed on to family members, ensuring they can remain in the family home without financial strain.

• A Foundation for Generational Wealth: For those with the means, permanent life insurance can be a powerful tool for estate planning. It can create an inheritance for the next generation, often with significant tax advantages.

• Business Succession Planning: For business owners, life insurance is a critical component of a succession plan. It can provide the necessary funds for a partner to buy out the deceased’s share of the business, ensuring its continuity.

• Tax-Advantaged Growth: The cash value component of permanent life insurance policies grows on a tax-deferred basis. This can be an attractive feature for those who have maxed out other tax-advantaged retirement accounts like RRSPs and TFSAs in Canada.

Insurance is too expensive

Many people, particularly younger and healthier individuals, vastly overestimate the cost of life insurance. This misconception can deter them from seeking coverage when it is most affordable. Term life insurance, which provides coverage for a specific period, is often surprisingly inexpensive and can secure a family’s financial future for a modest monthly premium.

Forced savings vehicle

The cash value accumulation in a permanent life insurance policy act as a forced savings plan. For those who may not have the discipline to save regularly, this feature can build a substantial financial asset over time.

In essence, while the core purpose of life insurance remains the protection of loved ones from financial hardship in the event of a death, its modern applications offer a suite of benefits for the living. A deeper understanding of these features can empower individuals to make more informed decisions about their long-term financial security.

To be continued…(next quarter)

Written by:

Leric Bishop BComm., CFP