This is a guest post series by Brian Poncelet who is an independent certified financial planner (CFP) working in the financial services industry since 1994. Along with insurance, Brian Poncelet focuses on mortgage and retirement planning.
The justification for the purchase of insurance is endless but in general, insurance is typically purchased to alleviate the financial burden that is thrust upon the family upon the death or disability of a family member. Even the most well planned investment portfolio has limitations if the family is forced to sell off assets for less than optimal prices in a down market just to be able to pay for capital gains taxes and/or basic living expenses.
A well planned insurance portfolio takes into account many factors, the least of which should include:
- burial, legal and capital gains expenses
- living expenses for a minimum of 2 years
- existing debts (mortgage, lines of credit, credit cards)
- number and age of dependents (children, parents: allocate $50,000, special needs children: allocate $100,000)
- future expenses (education: allocate a minimum of $40,000 per child for four years of education, new car, home maintenance, emergency fund)
- marketability of a stay-at-home spouse to re-enter the job market and find a fair paying job with benefits
2 parents age 35, husband earns $80,000, and wife earns $20,000. They have 2 children age 3 and 8 and carry a $200,000 mortgage. They have $100,000 in RRSP/non-register funds. How much life insurance is required on the husband?
- Mortgage: $200,000
- Children Education: $80,000 ($40,000 x 2)
- Two years salary: $80,000 X 2 = $160,000
- Emergency/Miscellaneous: $30,000
- Total Minimum Insurance Needed: $470,000
The above example is basic and does not factor in how many years the income stream will be required. For example, you may want your spouse to be able to stay at home until the children are no longer dependent. By searching “income replacement” on the internet you will find some excellent calculators to help you further define your insurance need.
Additional factors to consider:
- Pension Income. Pension income from the deceased spouse employer: typically a maximum of 60% is allocated the surviving spouse.
- Inflation. The effect of inflation on:
- The insurance policy: even if debt is paid off, an insurance policy worth $300,000 today will only be worth $245,000 in 10 years assuming 2% inflation.
- Assets: I frequently hear “my wife will use my RRSPs to fund retirement”. How much will $100,000 be worth in 15 years? Will that be enough to allow the family to make their yearly trip to Florida or buy a new car when necessary or send your daughter to that elite school for artisans in Paris?
- Group Insurance. Existing employer group insurance: remember this insurance is only good if you are still working for the company. Unless you have been with the company for at least ten years I would treat this amount as zero.
- Bank Mortgage Insurance. Existing Group mortgage insurance with bank: the amount of the insurance decreases with the outstanding mortgage balance. Only the residual mortgage balance is paid off. Also, if you change mortgage carriers you cancel the existing coverage and are forced to reapply at the new institution at higher rates as you are now older. If there are any health issues you may not qualify for the new insurance. More on this topic can be found in the Toronto Star at or a CBC video is the best I have ever seen. Both discuss term insurance. If you are going to consider that route, I recommend Term 20 or 30 rather than Term 10. Many people buy a bigger house around the 10 years mark, will not be debt free and have upcoming expenditures (education). The rate increases can seem to be significant in light of other expenses. It is best to defer this rate change for 20 to 30 years especially with a long term mortgage.
- Loss of future asset growth – contributions to RRSP or pension plan or simple long term growth on liquid assets.
- Goal modification. Will you have to modify your future cottage or recreational plans if future savings contributions cease or are diminished?
In the next edition of the risk management series, Brian Poncelet will discuss Disability Insurance detailing how it works and all the terminology involved.