We reviewed the Financial Consumer Agency of Canada’s life-insurance guide, the Financial Services Regulatory Authority of Ontario’s policy-type guide, FCAC’s guide to getting an insurance policy, and FCAC’s insurance-needs framework for this guide.
If there’s no financial gap that needs to be filled after your death, paying for life insurance could mean sacrificing money that could be used to pay off debts, invest, build an emergency fund or pay for necessities such as food and shelter.
When Does It Make Sense Not to Buy Life Insurance?
Changes in dependent status, debt levels, assets, health or employment should prompt a review of a “not now” answer.
Skipping coverage altogether may make sense when:
- no one depends on your income or household contribution;
- there are no debts, taxes arising at death or other financial agreements that would require ready access to cash when you die; and
- your assets would be adequate to pay anticipated death-related expenses without jeopardizing a survivor’s housing or retirement security.
Temporarily putting coverage on hold may make sense when paying premiums would divert funds away from necessities.
Is Life Insurance a Good Idea?
Life insurance is a tool and shouldn’t be something you buy without question. The first step is deciding whether you need it. FCAC describes life insurance as a lump-sum benefit paid on a person’s death.
Next, decide whether you need this payout to replace earnings, support dependants, pay off debt, cover final expenses or make a charitable contribution. If so, decide on the amount and whether to choose term, generally appropriate for obligations with an expiration date, or permanent insurance, which is intended for a lifetime need, tends to cost more and may accumulate cash value.
If you’re looking at permanent insurance, such as whole or universal life, as an investment, make sure you understand the cost of insurance, what is guaranteed, the charges, cash values and assumptions behind non-guaranteed illustrations.
Who Really Needs Life Insurance?
Labels like “parent,” “partner” or “business owner” can help when assessing needs. Ultimately, it’s not labels but exposures that drive the need for life insurance: anyone who depends on your income or unpaid caregiving; shared debts or mortgage payments that the other borrower couldn’t service without your income; a need for key-person coverage or life insurance funding a buy-sell agreement; or estate-planning goals that require liquidity, including inheritance equalization, documented lifetime gifts, final expenses and taxes arising at death.
Read More: Read Why Life Insurance Can Be Important
Top Reasons Not to Buy Life Insurance
Lack of Family or Dependents
You may need little or no life insurance if no one would suffer a loss of income, business value, housing or care if you die.
Include people who rely on you for income or care, whether formally or informally.
You may want to leave money for final expenses, a charitable bequest or to balance inheritances among heirs, but needs and goals are different. Life insurance isn’t necessary to accomplish everything you want.
Budget Concerns
Never pay for insurance at the expense of buying food, paying rent or utilities, or making minimum payments on your debt.
Don’t decide that you can’t afford any type of insurance until you’ve priced a term and amount of coverage that could meet your needs. If there is a real but temporary need, a smaller policy can get you through the most important period. Just don’t call it adequate insurance if it isn’t.
Alternative Financial Plans
Self-insurance doesn’t just mean having adequate assets; it means having adequate assets when you die. Consider whether those assets are liquid. Real estate may represent a sizeable portion of your assets, but it’s not always desirable or feasible to sell it after a death.
Other considerations include what happens to your assets in a down market, the potential tax bill and whether your survivor needs that money to fund their retirement.
Lack of Information and Knowledge
If you are unclear about the proposed purchase, stop. Don’t sign the application if you can’t review it carefully. Ask for a written explanation of how your insurance needs were calculated. Ask for an illustration. Find out if the insurer and the person selling the policy are licensed in your province or territory.
Pros and Cons of Not Buying Life Insurance
By not purchasing a policy, you keep the premiums that could go toward other household priorities. However, your household would have to bear the financial impact of your death.
To evaluate whether to buy a policy, compare its cost with the size, probability and timing of the potential financial shortfall. Comparing policy costs with investment returns isn’t enough.
Pros of Skipping Life Insurance
- You won’t pay for coverage your family does not need.
- The money can be used for necessities, disability insurance, debt reduction, an emergency fund or other financial goals.
Cons of Skipping Life Insurance
If an unfunded gap exists, a survivor may have to reduce spending, sell assets, take out new debt or move. Obtaining insurance later may cost more or require new underwriting or medical exams.
- Unpaid debts are claims against an estate. Relatives generally don’t inherit them, but a joint borrower or guarantor remains responsible for the debt.
- Paying debts may require the sale of estate assets or another source of funding.
- Understand the terms of each debt. Rules governing estates and debts vary by province.
Be cautious about assuming assets will be available. Confirm their ownership, beneficiary designations and tax treatment.
Alternatives to Life Insurance
Work-provided life insurance is still life insurance. However, it may stop if you leave your job. The amount is also usually basic coverage, warns FSRA. Check your certificate to see whether you can convert it to an individual policy and whether a deadline applies.
Final-expense insurance is a type of permanent life insurance. Accidental-death insurance only pays if death results from certain types of accidents. If someone dies from illness, this type of policy wouldn’t pay. Disability insurance is separate protection against losing income while still alive and could be a higher priority for some people.
You could use savings, investments or property to pay expenses.
Read More: Compare Buying Life Insurance and Investing
When to Review the Decision Again
Review your decision after a major change in any of these areas:
- assets, income, health or estate-planning goals;
- birth, adoption, marriage, separation or the addition of a dependant;
- co-signing a loan, taking out or changing a mortgage, or a major change in debt; and
- a new position, loss of group insurance, an upcoming conversion deadline, or a change in key-person coverage, buy-sell status or business ownership.
Read More: Use the Life Insurance Coverage Review Guide