Do I really need life insurance?

“In general, life insurance is most necessary when you have dependents who would be impacted financially by your death,” says Lorne Marr, director of business development at Hub Financial and founder of LSM Insurance, an insurance brokerage in Markham, Ont. “Typically, life insurance is used as a way to pay off a large debt, such as a mortgage on a home that you want to leave to your heirs.” But technically, you do not need life insurance. Unlike car insurance for drivers, it’s not required by law in Canada.

Why you may need life insurance

If you have a spouse and kids, ask yourself: What do you want to happen to them when you’re gone? Chances are, you’d like for them to maintain their current lifestyle, as opposed to dealing with financial uncertainty or having to move out of their home. (Read this MoneySense article to learn how life insurance works.)

If you have dependents, you probably need a life insurance policy. It can help settle debt obligations (such as your mortgage, auto loans and credit card bills), allow your dependents to stay in the family home, and cover everyday living expenses. Beyond that, it can pay for future life expenses (the cost of your children’s post-secondary education, for instance). 

If you’re single and no one is actively depending on your income, a life insurance policy is still worth considering. The death benefit may be enough to take care of any debts, cover those inevitable end-of-life expenses (such as your funeral arrangements) and provide financial support for your loved ones or favourite charities.

When you have a mortgage

A life insurance policy isn’t required for a mortgage in Canada, but it’s recommended. “It’s just smart to have,” says Jason Roy, a financial security advisor and managing partner at Adkins Financial in Brantford, Ont. “Your mortgage is most people’s largest expense and usually taken out on a couple’s total income. When something unforeseen happens, the last thing you want to be doing is making decisions because you are financially forced to.”

When you’re single and have debt

You may want insurance in this case, depending on your situation. A life-needs analysis can help you decide by accounting for things like your age, outstanding debts, assets and savings. A life-needs analysis also takes into consideration any future plans to start a family, leave money or assets behind to family members or donate to charities. 

Why you may not need life insurance

If you’re single, with no dependents or debts, and have enough savings and assets to cover all your end-of-life expenses, then it’s probably not necessary. The same goes if you have a family, but are financially set up in a way that would leave them well-cared for (i.e., a mortgage-free house, no debt and lots of savings tucked away).

Still unsure? Here are more scenarios

Retired, with no dependants

Katerina is a single 70-year-old woman with a mortgage of about $115,000. With no dependents and living on a limited budget, she would prefer not paying life insurance premiums. 

The verdict: No. “You do not need life insurance [in this case],” says Marr. However, let’s say Katrina wanted the reassurance of leaving money behind. That would be one reason to consider term life insurance or whole life insurance. A term life insurance policy, in particular, might be a better fit for someone like Katrina, for a few reasons:

• It is often the most inexpensive life insurance option available.
• The full-face value of the policy pays out upon the policy holder’s death.
• It’s often a suitable replacement for mortgage life insurance, which is more expensive and offers payouts that decline as the face value of the mortgage declines.
• It can create a nest egg for the loved ones you leave behind, which can be used to provide income replacement, pay off debt, create an emergency fund, cover final expenses incurred upon your death or simply leave money behind as part of an estate.

“If none of these apply to you and none of these circumstances are part of your overall financial plan, then save your money,” Marr says.

Young and single, with some debt

Steven is a 30-year-old single male with no kids or dependents. He rents an apartment, has a small car loan of $15,000 and credit card debt of $3,000, but has savings of $50,000.

The verdict: No. “Assuming [Steven] does not want to leave behind anything for their family or charity should they pass away, life insurance would not be required at this time,” says Adam Mitchell, president of Mitch Insurance, in Whitby, Ont. “Their current savings is enough to cover their outstanding debts and their funeral expenses, so life insurance would not be required at this time.” That said, if Steven eventually buys a home, gets married or decides to start a family, it would be wise for him to revisit his life insurance needs.

Married with children and a mortgage

Angela and Ryan are married with three children and are both 45 years old. Money-wise, they have a mortgage of $350,000, credit card debt of $4,000, and car loans totalling $40,000. They have savings of $200,000 and no other tangible assets.

The verdict: Yes. “With debts totalling $194,000 over [what they have saved] and three dependents, there will be a need for life insurance,” says Mitchell. “The total amount would be determined by a complete life-needs analysis.” Depending on the results of that analysis, and the couple’s budget, there may be a wide variety of options. Their options would include:

• A joint first-to-die policy, which pays out a death benefit to the beneficiary upon the death of the first of the two people insured under the policy.
• A joint last-to-die policy, which pays out a death benefit to the beneficiary only once both individuals have died.
• Separate term life insurance policies.
• Separate whole life insurance policies, for additional coverage focused on the family’s long-term financial planning. Whole life insurance provides coverage for life at a fixed premium, and another benefit is that you don’t have to re-qualify for coverage as you get older.

Established with good savings

Karen, a 60-year-old widow with no dependents, rents a condo, holds a $10,000 car loan and $4,000 in credit card debt. She has savings of $400,000 and no other tangible assets.

The verdict: No. “She has enough savings to reasonably cover all of their debts and final expenses, as well as leave behind money to family or charity if they wish,” Mitchell says. “No life insurance would be required.”

Quick questions about life insurance, answered

Are you required to do a physical exam?

Not necessarily. “It really depends on your age and the coverage amount you are applying for,” Roy says. Either way, you’ll likely be asked a lot of health questions, so that the insurer can better determine your level of risk, based on your habits, medical history and family medical history. Have that info ready and don’t be surprised when they ask.

What isn’t covered by life insurance?

Some causes of death, such as death by suicide within the first two years of signing your policy, may not be covered. Exclusions may also be made for certain high-risk activities, like extreme sports (think: rock climbing and parasailing). Finally, misrepresenting yourself or lying to your insurer will void your coverage.

Does age affect your insurance premiums?

Yes. The older you are, the sooner you are likely to pass away or encounter health problems. With that higher risk comes higher premiums. However, if you have term life insurance, your premiums are set for the duration of the term; it’s at the time of renewal that they may increase. And with certain permanent life insurance policies, your premiums remain the same for life—but this means paying more at a younger age.

What happens if you drop your life insurance policy?

It depends on the type of coverage you have. “Most term policies do not generate a cash value, so if they are cancelled the policy is voided,” says Mitchell. “However, with a whole life or universal life policy, there may be a cash value at the time of cancellation that would be paid out to the insured... This cash value may be subject to a surrender penalty, which would be determined by how long the policy has been in force, and the penalties listed in the policy.” 

Final thoughts

So, do you really need life insurance? The answer, as we hope the above makes clear, is not a simple yes or no. A lot depends on your situation, financial obligations and goals—whether or not you have kids or a large mortgage, for example. You may not need life insurance if you are single, live a modest lifestyle and are good at saving. But in many cases, if you have dependents, debts or not enough savings to cover end-of-life expenses, it’s worth seriously considering.

Read more about life insurance:

• Life insurance for kids: Do you really need it?
• How much does life insurance cost in Canada?
• Which type of life insurance is best
• You need long-term disability insurance. Now what?