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Buying life insurance? examine your assumptions! (Part I of IV)

All life insurance sales start out as an emotional decision. The life insurance industry is well aware of this fact and uses emotions in much of its marketing material. Conversely, some people will tell you that emotion should play absolutely no part in your decision.

I believe that somewhere in the middle is the correct answer. We need to know why we’re buying insurance. We need to understand and examine our assumptions that are based on bias, beliefs and emotions. From those assumptions, we can switch over to the cold hard facts and find the best coverage, the best type, and the best price for life insurance.

To show this contrast in approaches and assumptions, I’ve interviewed two different groups of people to ask them how much and what types of life insurance they own. The first group are some of Canada’s leading financial bloggers. These people write about finances as a hobby. They’re actively involved in the industry from an outsider’s perspective. They’re unbiased, as they don’t work in the industry, they just research and analyze it. I expect these folks will give us the cold hard truth about their life insurance purchases.

The second group of people I’ve interviewed are at the complete opposite end of the spectrum – life insurance brokers. These people are actively involved in marketing life insurance to the public all day long. They’ve seen thousands of individual’s purchase insurance for a wide variety of reasons. They’ve seen death claims paid, and the impact that has on the beneficiaries. I expect this group will be more towards the opposite end of the spectrum, having seen numerous instances of life insurance practically applied.

Let me contrast two scenarios to illustrate how your need for insurance is based on your underlying assumptions. Let’s say that you have a family cottage that will be inherited by your children. The cottage is worth say $500,000 so the children will have a tax bill of $100,000 when they inherit it. That’s $100,000 that the children don’t have handy. Person A simply passes the cottage down through their estate, resulting in the kids having to sell the cottage. They sell the cottage, pay the government $100,000 and pocket the remaining $400,000. Person B is adamant that the cottage they’ve enjoyed across generations remain in the family. They purchase a $100,000 permanent life insurance policy. When they pass away, the children take the $100,000 insurance proceeds, pay the taxes owing, and continue to enjoy the cottage with their children.

Which person was right? Person A doesn’t need life insurance and their children got $400,000 and no cottage. Person B needs $100,000 of life insurance, their children got no cash in the end, but got a cottage. Clearly, they’re both right. It simply depends on their underlying personal assumptions and preferences. However if you’re person B, we now know that you need $100,000 of permanent life insurance. Now we can go looking for the least expensive route to fill that need.

Tomorrow in part II of IV, we’ll interview some of Canada’s top financial bloggers to see their life insurance purchases.

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