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Life insurance is a bad investment and investments make bad life insurance. Hence, don’t buy life insurance as a savings plan, especially if you don’t need it. After insurance, administration, and management costs are deducted, there are other more sensible options.

Set aside any spin you may have heard and first lay a proper foundation by carefully analyzing your insurance needs. Here is a simple way:

  1. List the lump sum needs that must be paid in event of death. These include burial expenses, legal fees, debts, and mortgages.
  2. Make allowance for educational expenses for your children, if applicable.
  3. Determine the income lost to your family if you die.
  4. Make allowances for the impact of inflation.
  5. Deduct any in-force life insurance and savings that are not required for retirement.

This might look a little daunting, but we have a great life insurance needs calculator that you can access below.

Normally,  term life insurance is used for the duration of the coverage need. Term life insurance covers the peak earning years when your family most depends on you.

As far as saving money goes, you should invest in the following order:

  1. Pay off consumer debt, especially your credit cards
  2. Contribute to your RRSP, especially if you are in a higher tax bracket
  3. Pay down your mortgage
  4. Contribute to your TFSA
  5. Once items #1-4 are covered, consider tax-effective non-registered investment plans.

Consider the use of universal or whole life policies at certain times.  If you have large capital gains on business and property, these permanent life insurance plans may be a good idea. They deliver cash required upon death to pay the taxes due when transferring assets to the next generation.

Above all, don’t take my words as gospel. Each situation is different. Get help from an advisor you trust and craft a plan suited to your unique circumstances.

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