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LIFE & HEALTH

The life-stage approach to income protection

The life-stage approach to income protection

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Graduating from school, getting married, or having children are all happy milestones that bring change, growth, and more responsibilities. That's why these events may trigger a need for life insurance in order to protect your family and survivors from financial hardship as your responsibilities grow.

Busting the age myth

Simply put, life insurance is a tax-free lump-sum payment upon the death of the insured person. Think only older people can benefit from the coverage it provides? Think again.

"Actually, when you're younger, your spouse or partner may have a harder time absorbing the loss of your income. That makes protection more important," explains Dave Minor, Vice President of Retail and Wealth Distribution for TD Insurance. "When you're older, however, you have a higher risk of passing away, but your survivors are likely to be in a more secure financial position."

Dave Minor explains how a life-stage approach is key to determining how soon you should obtain life insurance coverage and to assessing how much you need at each stage.

Life-stage benefits of insurance

The death of a loved one takes an enormous emotional toll. And unfortunately it may also come with significant financial consequences. That's why any time there's a change in your financial situation is a good time to visit or revisit your insurance needs:

  • Just graduated from university/college: "A common reason to purchase life insurance is to ensure that any debt you have when you die isn't passed on to your family," says Mr. Minor. "At this age, you may have debt that's shared with your parents — like if they co-signed a student or bank loan for you — that a life insurance policy can pay off should you die." He also notes that insurance premiums are at their lowest when you're young so payments will fit easily into your budget.

  • Just married or just moved in together: At this stage, you probably share a collective income and have shared everyday expenses (like rent, food, and utilities). You may also have combined debt, such as a car loan or mortgage. "At this time, life insurance will guard against the sudden loss of one of those incomes," he explains. "A life insurance payout could ensure the surviving spouse or partner can meet their financial obligations. That's a real comfort, especially if you've bought a home — probably the biggest purchase you'll make in your lifetime."

  • Just starting a family: Without doubt, the death of a parent is emotionally devastating; but it can be financially devastating as well. According to the Canadian Council on Social Development, in 2004, the cost of raising a child in Canada was just less than $167,000. "The loss of one income could put a strain on the family finances, and there may also be new expenses including household and child-care help," says Mr. Minor. "The last thing you want is for your family to struggle to make ends meet or have to make drastic cutbacks, such as losing the family home."

The right amount

Everybody's situation is different. That's why there is no formula that will fit everybody's needs. "There is one general rule of thumb," explains Dave Minor. "Have enough insurance to pay off outstanding debt and provide two to five times your annual salary. That way, you'll get rid of your debt and your survivors have enough income to cover expenses for the next three to five years."

He also advises to start by doing some research. Speak to your insurance company or financial advisor, and use online calculators to help calculate your need, to be better informed.

"Some insurance is better than no insurance," he says. "If you can't afford as much as you need, then get what can fit in your budget."

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