Stay afloat with a financial life-preserver

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This article was published 10/11/2023 (678 days ago), so information in it may no longer be current.

Winnipeg certified financial planner Jason Evans doesn’t often recommend life insurance to his clients.

Most are nearing retirement, or retired, and they come to the fee-only financial planner for help to plan retirement income. Their need for life insurance is often minimal.

But should his peers — millennials with children — ask for advice, among his first recommendations is to buy life insurance if they haven’t already.

“Parents need to protect their ability to produce income for their kids,” says Evans, with Evans Retirement Planning.

That’s what life insurance provides should one or both parents die.

Evans is biased, he admits, but not because he sells insurance.

He doesn’t — or any other financial product for that matter.

Rather, he has experienced firsthand the tragedy as a child of losing not one but both parents.

“My dad died when I was eight. He was 32 years old. It happened suddenly,” Evans says. “He was a healthy guy, a carpenter, and got a brain aneurysm.”

Their family had just moved into a new house with a mortgage.

“My mom was a stay-at-home mom, and fortunately, my dad had life insurance.”

That allowed the family to continue to stay in their home, while his mom took care of him and his sister without financial hardship among their many challenges.

Evans worries too many young families do not have that protection. Although some parents have coverage through their employers, others have none at all, often deeming the cost too much amid all outlays.

Even before inflation and interest rates began rising, a 2021 RBC study found a significant need for coverage, noting about a third of Canadians ages 35 to 54 would likely not be able to afford child-care or housing if one spouse died.

The survey also found less than three in 10 saw life insurance as beneficial while 40 per cent stated they were confused about its different types, which include term, whole life and universal life coverage.

To be clear, most young families need term insurance, the most affordable, says Terry Bialek, insurance specialist with WFS Wealth and Financial Strategies in Winnipeg.

“When you’re young and don’t have a lot of money, you should buy life insurance to create an estate to protect your family.”

Term insurance — which offers coverage for a set period, often from 10 to 30 years —i s designed to do that, replacing lost income if breadwinners die so the family can at least carry on financially.

“If it’s a young couple with a couple of kids and a big mortgage, they will never have a bigger need for term life insurance than today,” he says.

Many employed individuals likely have term coverage through their employers, but it may not be sufficient because most group plans pay two to three times salary, says Annie Campoli, vice-president at TD Insurance.

As well, “you’re only protected for the duration of your time with the company,” she says, noting the coverage ends with a job loss, leaving families financially vulnerable.

Having private term insurance is an affordable option that stays in place regardless of employment status only as long as required, often until the kids finish school — post-secondary education included.

“So, if a couple earns from $100,000 to $150,000 a year, they might need $1.5 million to $2.5 million of coverage,” Bialek says, noting that could be for a 10- or 20-year term.

Of course, a big concern for families is the time and cost involved.

“While families sometimes choose to postpone purchasing an insurance policy during economic turbulence, this is often the time when we need extra financial support in our back pockets — in case the worst happens,” says Jean Salvadore, senior director at RBC Insurance in Toronto.

To that end, it’s not just life insurance coverage to consider, but critical illness too, which provides a benefit if a parent is diagnosed with a serious condition like cancer.

A financial advisor can help determine needs, ensuring families only pay for as much coverage as they need. Oftentimes, young families get mortgage-linked life insurance that pays the mortgage upon death of a parent, which may be insufficient and financially inefficient, Evans says.

“People take it because it’s easy to get, but they should really shop around for term coverage because the money goes to them rather than to the bank to pay off the balance of the mortgage.”

What’s more, the premiums for term life offer more coverage for less premium.

“It’s pretty cheap for a 20- or 30-year-old to get term,” he says, noting he pays $35 for term coverage.

Premiums are also significantly less than those for whole or universal, permanent forms of life insurance in place until death.

Bialek says that permanent insurance has its value, particularly as a wealth planning tool for families that have accumulated significant assets.

“Permanent coverage is not about creating an estate; it’s about protecting the estate,” he says, adding the death benefits for all forms of life insurance are non-taxable.

That makes permanent coverage useful for paying taxes that would arise for an estate, for example, on registered retirement assets, a business or a cabin.

Bialek further notes premiums for life coverage have come down even as costs for almost everything else have gone up.

That’s all the more reason for young families to consider term today, given premiums often increase with age.

In short, term insurance is a low-cost means to mitigate a massive financial risk, one that Evans knows too well — twice over.

When Evans was 18, his mom died of cancer.

“Fortunately, she had life insurance too, which allowed my sister and I to get a start in life,” he says.

“If our parents hadn’t had insurance, our lives would have been much more difficult.”