April 8, 2023

Life Insurance – Do you Buy, Rent, or Borrow?

Chris Lubell

It is probably insufficient to pay off your mortgage and/or support your spouse and family financially.

Most of the time, the amount of life insurance protection offered by group insurance is only one or two times annual income.  If this is insufficient, adding individual life insurance should be taken into consideration.

Your life insurance coverage could be cancelled if you lose your employment.

You might discover that you have no life insurance at all if you now work for a company or in a sector of the economy that could be at danger.

You will typically lose your group insurance if you retire or quit your employment.  Although most group life insurance policies have a conversion option to an individual plan, these plans are sometimes quite expensive or have a lot of restrictions.

What role in your planning should group life insurance play?

Let's first examine the differences between individual and group life insurance in order to respond to your query. Individual life insurance is available in two different forms: term life insurance, which expires at a particular age, and permanent life insurance, such as universal life or whole life, which offers protection for the duration of the insured's life and has the added benefit of allowing the insured to accumulate savings through a cash value.
Consequently, one can classify the particular kind of life insurance into one of three groups:

  • The kind of life insurance you have is permanent.
  • By consistently paying your premiums, you increase the value of your insurance. The insurance coverage might eventually be fully paid or able to support itself.  Even better, you can borrow against the equity in the policy, much like you could do with the equity in your house.
  • the kind of term life insurance you rent.  The typical renewal duration for term life insurance is ten, twenty, or even more years.  Your "lease" is renewed at the end of this time for an increased fee (the "rent").  The same is true of term insurance as it is with renting a house—you never accumulate any equity.  The policy ends at a specific age with no monetary value after paying all those rental premiums.
  • The kind of group life insurance you borrow. Since that agreement is between the employer and the life insurance provider, you, the insured, do not have a contract with them.  The entire benefit package may still be cancelled by the employer and insurance provider. Therefore, it might be said that your company is "lending" you the coverage, to use an analogy.  

When comparing these three forms of coverage, it is advised that you start with permanent coverage as a base or foundation because it would offer lifelong protection at a set price. This has the additional benefit of building equity, which may then be used as collateral for loans should the need for money in the future arise.

Then, to safeguard a developing family and make sure that there would be enough money to pay off debt and support the family's needs, you can think about layering more affordable term insurance.  When children are young, there is a very high reliance time and high expense period with a family.  For suitable protection during this time, low-cost temporary insurance is used.  A benefit of term insurance is that, should you become uninsurable, you can convert it to permanent coverage with a wider range of possibilities than with group life conversion.

Finally, for individuals who already have group life insurance, this coverage can be viewed as an addition to their existing term insurance or as additional protection against unforeseen events.  
If you want to talk about reorganising your life insurance policy to achieve the best outcome, give me a call.  Please feel free to forward this post to anyone you believe will find it useful.

According to a recent research by the Life Insurance and Market Research Association (LIMRA), 61% of Canadians have life insurance of some kind.  Unexpectedly, it also showed that only 38% of Canadians are the owners of a personal life insurance policy. This indicates that nearly 40% of people only rely on the life insurance coverage their employer offers. This might be a problem.  The following are some drawbacks of using your employment benefit plan as your only form of life insurance:

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