What do seat belts, helmets, and life jackets have in common? They don’t make the ride more enjoyable, but if something goes wrong, they can prevent a tragedy. Insurance works the same way. It’s your financial safety net, protecting you and your family from the worst-case scenario. 

There are many types of insurance that help reduce financial stress and keep your financial plan on track. In this article, we focus on one of the most important: life insurance. 

Why Life Insurance Matters in Financial Planning 

Most financial plans focus on goals like retirement, saving for a child’s or grandchild’s education, and building wealth to leave a legacy. At the same time, people want to enjoy life today. A solid financial plan helps balance current lifestyle expenses with long-term savings. 

But what happens if one of the household income earners passes away unexpectedly? Financial projections often assume a steady income, but that income can vanish in an instant. A death in the family has not only emotional consequences but also serious financial ones. Life insurance helps protect your family’s financial future by reducing the impact of lost income and unplanned expenses. 

Replacing Income and Covering Financial Obligations 

When someone who earns income for the family passes away, the financial impact can be immediate and significant. A life insurance benefit can replace a portion of that income and help avoid financial hardship during an already difficult time. 

Here are some important questions to consider: 

• Could your family maintain their current lifestyle and activities?

• Would they be able to stay in the same home and keep up with mortgage payments and maintenance costs?

• Could the surviving spouse still contribute toward long-term goals like retirement and post-secondary education?

• Would the surviving spouse need to take unpaid time off work to help the family adjust?

Life insurance can also help cover immediate expenses such as funeral costs and debts. But one often-overlooked factor is tax. 

In Canada, when someone dies, they are considered to have sold all their capital assets at fair market value. Additionally, the full balance of their RRSPs or RRIFs is treated as withdrawn and therefore, are fully taxable. Unless a spousal rollover applies, this can result in a large tax bill, which the estate must pay. Life insurance provides the liquidity to cover that bill, preventing the need to sell valuable assets and preserving the estate’s value. 

Business Owners: Funding Your Shareholder Agreement Obligations 

If you’re a shareholder in a private corporation with co-owners, your shareholder agreement likely includes a buy-sell clause. This clause ensures that if one shareholder passes away, the surviving shareholders, or the corporation itself, will purchase the deceased shareholder’s shares from their estate. That way, the business will remain under the control of the surviving shareholders and the estate will receive the value of the deceased owner’s shares.

In most cases, the simplest and most efficient way to fund this obligation is through life insurance. Each shareholder is insured, and the death benefit provides the funds needed to buy the shares without placing financial pressure on the business or the surviving shareholders. It also ensures the deceased’s estate receives the fair value of the shares promptly and without complication. 

Not for You, but for Them 

While some life insurance products offer a tax-sheltered investment component that can support retirement planning, the primary purpose of life insurance is simple: to take care of the people you leave behind. It’s about ensuring your family can carry on without financial stress, and that the long-term goals in your financial plan don’t fall apart. 

There exist many life insurance options. Before choosing a product, it’s important to determine how much coverage you need. A financial planner or licensed life insurance advisor can help you complete a needs analysis, a process that identifies your financial obligations, the income you want to replace, and any coverage you already have. 

And if you already have life insurance, but your circumstances have changed significantly since you bought it, it’s a good idea to review your coverage. You want to make sure your financial safety net still fits your current needs. 

Life insurance doesn’t bring comfort like a new car or a vacation might, but like a seat belt, it protects what matters most when life takes an unexpected turn. It’s not for you, it’s for the people you care about.