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household finances


Experts say a life insurance policy should be a staple in a family's financial plan, yet many still struggle at the mere mention of it.

Apart from the notion that insurance premiums aren't affordable, many people don't like thinking about the end of life, let alone discussing it in detail.

"It's not exactly buying something sexy, like an iPad, or some kind of Apple products," says Cathy Preston, vice-president, Life and Health at RBC Insurance.

Thinking of buying insurance, she admits, forces one to deal with one's demise. And there's also the cost of paying for insurance, when there are other bills to pay and more tangible things to buy.

But Moshe Milevsky, an author and finance professor at York University, said that there are a lot of ways to cut down on the cost of life insurance premiums.

First on the list is assessing how much coverage you need.

The basic function of an insurance is to replace the income you provide your dependents once yours is removed from their budget. If you are single or have no dependents, you may not even need one.

To determine the coverage, decide how much of a continuing income will be required by your dependents — including living expenses, the cost of repaying debts like mortgages, post-secondary education and caregiving costs for parents or elderly relatives.

Don't forget to check all the other coverage you may have from group insurance at work to credit card or mortgage insurance.

Take the continuing income you came up with and minus the other coverage you already have. The new figure should give you an idea how much life insurance coverage you need.

The next step is picking the type of insurance to achieve your goal.

Term insurance, which is sometimes deemed temporary, provides coverage for a certain number of years. It may be five, 10, 15 or 20 years.

It may be cheaper than other types of insurance because all you're buying is a promise of cash if you die during the term. Other types of insurance also include savings or investment component and generally last longer.

But the cost of term policies may rise dramatically when it's time to renew at an older age, which is a major factor in calculating premiums.

Term insurance also has no liquidity, since there's no investment or savings attached to it.

"You can't borrow against it. You certainly can't cash in your policy and get money in exchange," Prof. Milevsky says.

Permanent life, which is sometimes called whole life insurance, may seem expensive when you buy at a younger age but the premium may fall as you get older as the investment gains are directed to pay for the premiums.

Prof. Milevsky said that the best thing about buying the whole life plan is "you buy almost two things at once: a life insurance and a little bit of a savings plan." The premiums you pay build up an investment fund as you age.

Whereas term insurance is geared towards the 25-year-olds, whole life's audience is in their 40s.

Experts suggest that if you can only afford term insurance at the moment, make sure you get one that can be converted into a permanent life policy at a later date. This is called a convertible term policy. That way, you do not have to start from scratch in paying your premium.

This is highly recommended for those who are single and starting out in life. As your needs change, such as when you start to have kids, you can convert to it to a permanent life policy.

The last type is universal life insurance: the most flexible, albeit complicated, of the three since it combines the benefit of term and whole life.

"You can think of it as a mutual fund with some life insurance thrown in," Prof. Milevsky said. "You have a lot more flexibility in the breakdown between the insurance and the savings."

Like whole life, the universal life plan also covers you for the rest of your life.

Once you've determined what you need and can afford, you want to make sure you start early. Most insurance policies are cheaper when you are young and healthy.

Gary Gorr, a financial advisor for Independent Financial Concepts Group, says that buying a policy when you're young is one of "the best things" you can do.

"It's a bargain when you are in your 20s."

Mr. Gorr, now 60, bought his first insurance at age 22. He paid his last premium 10 years ago.

He also suggests paying the premiums annually instead of monthly. Most insurers charge you about 8.5 per cent a year for the convenience of paying on a month-to-month basis. If you can make a lump sum payment per year, then you save that 8.5 per cent charge.

But Mr. Gorr says "the easiest way to lower your premium is to improve your health."

He provided calculations for a 35-year-old male smoker versus non-smoker on a 10-year term policy with a coverage of $250,000. The smoker will have to pay a premium of $342.50 per year compared with $200 per year for the non-smoker, noted Mr. Gorr, who was a smoker for 37 years before he quit two years ago.

Prof. Milevsky's personal experience on the other hand, had to do with travelling. As a professor who has to give lectures all over the world, he had to refrain from visiting certain regions in risky countries.

"Africa and places in Mexico are a no-no (on the) list."

Prof. Milevsky advised checking with your insurer on what places are deemed risky. He also suggested shopping for insurance for your demographic.

"If you are a doctor, a teacher, there is a group that offers to your demographic at a cheaper rate," Prof. Milevsky said.

For those into extreme sports, you might want to look for an insurer who caters for the daredevil in you.

RBC's Ms. Preston, who is into heli skiing, said that insurance companies can decline coverage depending on where it is and its frequency.

Experts suggest getting a certification if you are really into the sport. They also said to talk to a professional to take advantage of the many features a life insurance can offer.

"You have to think about it as a Swiss army knife," said Prof. Milevsky, adding that while insurance sounds pretty simple but "there are lot of features inside that you want to know how to take advantage of."

But if you are one of an estimated 45 per cent of Canadians who don't have a life insurance because of cost, Mr. Gorr said to go for the one you can afford.

"Just like cars, there are Chevs, Buicks and Cadillacs. Some people may want a Cadillac plan but only have Chev money," Mr. Gorr said.

"Buy the Chev," he says. "The key is, your family is protected."