Day-to-day life can be a struggle, right?! Cook, clean, do the laundry, fold the laundry, be successful at your job, be a good parent and a good partner, call your mom, go to the dentist, pay your bills, eat, sleep, repeat. We’re so busy trying to ‘live our best lives,’ it’s no wonder future planning sometimes falls to the end of our to-do lists. But the future will become the present faster than you think – and you may not be as prepared as you should be.
One important way that you can prepare for the future today is with life insurance and an updated Will. It may not be glamorous, but believe it or not, both are important together. When it comes to life insurance and Wills, there’s some confusion around whether or not everyone (especially younger people) really need them and if it’s necessary to have both versus just one or the other. Understanding the answers to these questions helps to clarify how the two are similar and how they are different.
But first, let’s dive into what life insurance and Wills are.
What is Life Insurance?
Life insurance is a contract between the policyholder (you) and an insurance company. You pay the company monthly payments throughout your life on a predetermined schedule and in exchange, upon your death, the life insurance company pays out a lump sum to your family (called a death benefit.)
There are two types of policies to consider: term life insurance and whole life insurance. A term life insurance policy is the simplest and most affordable form that pays out a benefit to your beneficiaries if you die within a specified timeframe. Term is also the best option for 95% of young families that need life insurance.
Whole life insurance (sometimes called permanent policies) are much pricier and guarantee your beneficiaries get a death benefit. Since you pay monthly fees for your whole life (as the name suggests) with these types of policies, regardless of how old you are or when you die, your insurance company will still pay out.
What Is a Will?
A Will is a legal document – more formally called a Last Will and Testament – that lets you provide instructions for how you want to distribute your money, investments, property, and belongings (your estate) when you’re no longer here. The people and/or charities you leave your estate to are called beneficiaries.
Your Will lets you legally appoint people to important positions like:
- Executor (who will wrap up your affairs)
- Guardian (who you want to take care of any dependents if you die before them)
Similarities Between Life Insurance and Wills
Okay, now that we've distinguished between the two, let’s dive into how they are similar and the important differences that set them apart.
Both Life Insurance and Wills Aren’t About You
One major similarity between life insurance policies and Wills is they really aren’t about you –they are about the people you love.
Life insurance is especially important if you have people who depend on you financially, like a partner and/or kids. If you die without life insurance, your loved ones get left to foot the bill for things like your funeral and burial, all while struggling to maintain their standard of life when you were able to financially support them.
Similarly, passing away without a Will puts an unnecessary burden on the people you care about. Dying without a Will is called dying intestate. Besides forcing your loved ones to make unguided decisions on how to wrap up your affairs, when you die intestate, you also lose control over how your estate gets distributed. What’s worse, if you leave behind any dependants, the courts decide who will take care of them, regardless of what you would have wanted.
Having a life insurance policy and a Will in place ensures that your loved ones are protected from any financial burden after you die. It also gives them peace-of-mind knowing they don’t have to guess at what you would have wanted.
Life Insurance and Wills Both Help You Prepare for the Unexpected
Let’s face it, nobody wants to contemplate their own death. That’s probably why most people put off having conversations around life insurance and estate planning altogether. After all, they force you to think about all those ‘what if’ moments and worst-case scenarios.
An overwhelmingly large number of Canadian adults don’t have these two very important pieces of their future planning puzzle in place. 42% of Canadians don’t have a life insurance policy, and 51% don’t have a Will. Yikes! That leaves a large chunk of the population simply unprepared for life’s twists and turns.
If 2020 has taught us anything, sometimes life changes happen more abruptly than expected. It’s more important now than ever to prepare for the future. Both life insurance and Wills help you plan for these unexpected moments and make sure your loved ones are covered no matter what.
Life Insurance and Wills Both Let You Support Charities (But in Different Ways)
Did you know that you can continue to support the causes you care about most in life after you die as well? Both life insurance policies and Wills give you the option of supporting one or more charities of your choice (called planned giving). However, they both do this in very different ways.
The most important difference is that you can use your life insurance policy to leave a gift to a charity of your choice while you’re still alive. Whereas any gifts you leave to charity in a Will are only actualized after you pass away.
There are a few different ways you can leave a gift to charity with your life insurance:
- You can transfer your policy to the charity in exchange for a gift receipt.
- You can apply for a new life insurance policy and name the charity as the owner. If you do this, you’ll get a tax receipt for any premiums you pay.
- You can add a charity as the beneficiary of your life insurance policy. In this case, your estate will get a tax receipt that can be used as a death benefit.
Leaving money to a registered charity in your Will is a bit more straightforward. You simply add the charity to your Will and set a fixed amount or the percentage of your estate you wish to gift.
You can update your Will any time to change the amount, add a new charity, or remove a charity. But none of the charities will receive their gifts until after you die. There are also tax benefits associated with giving to charities in your Will.
Both Life Insurance and Wills Let You Name Beneficiaries
When you purchase a life insurance policy, you’ll name one or more beneficiaries to receive a lump sum of money after you die. However, you can leave both money and items to beneficiaries in your Will.
It’s important to note the death benefit of your life insurance policy is paid to your beneficiary and does not form part of your estate. So, if you’ve named a beneficiary on your policy, those insurance proceeds will not go to a beneficiary named in your Will.
But if you haven’t named a beneficiary on your policy – or if they’re not alive – your life insurance proceeds would form part of your estate and be distributed to the beneficiaries named in your Will.
Differences Between Life Insurance and Wills
Now that you know some of the similarities, let’s dive into the major differences between these two things!
Every Adult Needs a Will, but Not Everyone Needs Life Insurance (Yet)
Believe it or not, life insurance isn’t for everyone!
If you’re currently single with no dependents, then life insurance isn’t that important (yet). If you’re one of the lucky few who’s accrued enough wealth that your dependents will be financially taken care without your income, you probably don’t need to purchase life insurance.
On the flip side, every adult needs a Will, despite the common misconception that you don’t need a Will if you’re young or if you don’t have a lot of money and expensive things. But remember, making a Will isn’t about what you have, it’s really about who you love. Having a Will in place also ensures decisions regarding what happens after you die aren’t left up to other people or provincial courts.
Life Insurance and Wills Require Different Types of Information
Life insurance and Wills are deeply personal and unique to every individual but both need some basic information, like:
- Full name
- Beneficiary information
Beyond basic info, life insurance tends to dive much deeper into personal aspects of your life like:
- Date of birth
- Health status
- Whether or not you smoke
- Daily activities, like what do you for a living and your hobbies
Conversely, to complete a Will, you only need a more general understanding of your assets and debts since you leave portions of your estate (not exact dollar values) to beneficiaries. You can choose to go into more detail if and when you decide to leave specific gifts – like expensive art or your car – to people. You can also choose to leave specific amounts to charities.
Life Insurance Policies and a Will Protect Your Children in Different (but Complementary) Ways
When you have dependents who rely on you financially, it's extra essential to have a life insurance policy and a Will in place. Life insurance lets you leave a lump sum of money to your children when you pass away, which is especially crucial if the unimaginable happens and you die while they are still young.
A Will lets you leave both money and things to your kids and, most importantly, enables you to appoint a guardian. A guardian is probably the most important appointment for any parent making their Will. A guardian is a person you choose to take care of your kids if you pass away while they are still under the age of majority. It’s not pleasant to think about, but it's necessary to consider all possibilities to ensure your kids’ safety and security.
You work so hard all through life to do 'all the right things' and plan ahead, especially when it comes to your family and loved ones. Most people don't realize no plan is complete without considering what happens after you aren’t with your loved ones, and both a life insurance policy and a Will are part of that mix.
Life insurance and Wills handle aspects of your life differently, but both work hand in hand to ensure you have all your bases covered when it comes to future planning. And while things like insurance and estate planning mean some money out-of-pocket in the short term, what you’ll save for your loved ones both financially and emotionally in the long term far outweighs any upfront costs.
This is a guest post from our friends at Epilogue, an online estate planning platform for Canadians.