Personal Finance

Life Insurance Q&A - w/ FAQ Section

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  • Apr 16th, 2017 1:54 pm
Newbie
Dec 31, 2016
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Recently married, new homeowner with no kids yet.

Husband and I both in our early 30s, have very minimal life insurance through work and have around 400k mortgage. No other debts.

Does it make sense to just focus on term life insurance for 20 years to cover the mortgage?

When would it make more sense to get UL?

Thanks!
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mkl38s wrote:
Mar 12th, 2017 3:22 pm
Does it make sense for me to stop buying life insurance now? I started buying term life insurance 25 years ago with $350K policy initially and then raised to $500K after the first 10 years. I also have a group insurance I purchased from work ($500K). The reason I bought that much because I am the only one working and my daughter always wanted to study medicine when she was young. So I wanted to leave enough behind to help my family if something happened to me. Today, I am into a 5th year of 20 years term policy and it costs $1620/year for the $500K. I just realized I probably don't need this anymore. We have enough savings now so if something happens to me, my wife would still have enough money to live comfortably for the rest of her life. My daughter is already in med school with all tuition fees paid for by scholarships, so she doesn't need much of my help. Stopping the policy now will save me $24000K and I still have $500K from work (providing I am still employed). Am I doing the right thing stopping the insurance (even though we could afford it if we continue)?
From what you mentioned, I would agree, if you have no debt and your wife would be comfortable financially for the rest of her life, then by all means it may make sense to cancel your coverage. but with that said, I would be more inclined to suggest you keep your independent coverage over your optional group coverage (assuming costs are relatively the same and if you still want coverage of any amount). Optional coverage (depending of course on a few factors) can be more expensive than individual and will continue to increase in cost as you age - where as the term 20 will not (for the remaining years). Further to this, your individual coverage should have decent conversion options (should you ever wish to change it/convert it down the line) - where as most group coverage is limited as to what you can do with it once you terminate employment or reach a certain age.

Which company is your individual policy with and with what company is your group life coverage? How much do you pay for your individual policy vs the optional group coverage?
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romanr01 wrote:
Mar 14th, 2017 1:48 pm
Hi

I've been gradually reading the posts to this Thread, which is numerous. So far I'm picking up some valuable information. I wanted some opinions on this particular strategy provided by my CFP/Insurance broker.

I am a 40 year old, married with 2 children under the age of 4. I am a healthcare provider who is incorporated. I have a modest RRSP saving ($100K), minimal TFSA. I have T10 $300K, T20 $600K along with CI and DI. He is proposing to convert $100K of the T10 into a permanent insurance (Equitable Life Equimax Estate Builder with PUA option) and transferring it into the corporation. He referred to it as a CIRP (corporate insurance retirement plan). Some of his reasons were as follows:

My current age - the premiums will only get higher
Using my corporation earned income to pay for the insurance is generally cheaper than using the dividends I transfer to myself to pay for it.
It has a guaranteed death benefit
Currently the dividend scale interest rate is 6.5% which can be higher than some GIC, and better to pay into this than trying to reduce your mortgage which can have an interest rate of 3%
It is a way to be able to borrow money from the insurance plan to fund corporation growth
I can use the borrowed money to fund retirement, or use it as an emergency fund, It can even replace my CI when the term on it runs out.

It seems to have a lot of benefits, but some of the issues I have so far are:
I have a guaranteed premium/year (about $3000). I have seen the "pay term and invest the difference" strategy. Essentially, I would be putting money into this rather than a growth oriented TFSA. Which one would be better?
I am confused about the need for estate planning
I know there will be a need to pay back at least the interest if any loan is taken out. Is there a risk that the money will be inaccessible in the future by me, or, if I die, my beneficiaries?
Are his reasons really as beneficial as they seem to be?

Any other opinions would be greatly appreciated. Thanks
Romanr01,

As an incorporated healthcare practitioner, you are in a unique situation when it comes to investing and risk management strategies. If you are a saver and will have retained earnings inside your corporation, that you would be otherwise investing, the use of permanent insurance (more so whole life) is a good way to go about it if your risk tolerance is lower/and or you would otherwise invest in fixed income instruments yielding interest income (which is taxed aggressively and inefficiently in corporations - as passive income).

I work with a number of physicians and business owners who employ this strategy - of course in conjunction with others (i.e. paying yourself enough salary for CPP, and to maximize contribution room, income splitting with spouse, etc.).

With regards to your issues:

a) These are basically two different issues - the corporate IRP involves leaving money to be invested inside your corporation (with pre-personal tax dollars) where as the use of a TFSA involves after tax dollars (would have to be pulled out of the corp as salary or dividend). Secondly, the IRP should not be compared to an equity growth strategy (apples to apples) as they are on opposite sides of the risk spectrum. Most whole life has guaranteed cash value - which vests, unlike other equity investments. Because of the guarantee, it should actually be compared to fixed income, even though the returns (dividend crediting and total death benefit can more closely resemble that of an equity investment). So to reiterate, this CIRP should in my opinion replace the fixed income component of your corp fixed income strategy.

b) Estate planning is tax planning and with the idea being to pass on wealth efficiently and effectively to your heirs with the least amount getting taxed. While this may not be a consideration now, it may be in the future. Permanent insurance is supposed to last a lifetime, meaning essentially it is a guaranteed tax free pay out to your beneficiaries. Because participating whole life will continue to grow over time, you can maximize what goes to your beneficiaries, tax free, as opposed to other methods.

c) A policy loan should be a last resort should you need funds (or the corp) as you should have other funds accessible for this use. The CIRP should only make up the fixed income portion of your over all portfolio. I.e. if you are a moderate aggressive investor (70% equity, 30% fixed income) the maximum cash outlay this strategy should represent is 20-30% of all retained earnings (I like my clients to have at least 10% cash at all times). So if a health care practitioner has retained earnings of $75,000/year after all salaries and dividends paid, corporate taxes, etc - $15,000 to $22,500/year could be dedicated to an IRP strategy. The rest would go to equity investments and cash reserves. The cash and equity portion of the retained earnings is tax efficient and is highly liquid.

So yes, there is a good reason to use a strategy like this, but its not for everyone. Your advisor knows your needs better than we would. One suggestion would be to do this policy as a paid up policy - paid up in x number of years (most common is 20). From a income planning point of view, the future is less clear than is the present so projecting cash flow out over multiple decades is difficult. Because of this, I prefer paid up policies for the IRP strategy - as it is a commitment.
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ohfive wrote:
Mar 14th, 2017 10:17 pm
Recently married, new homeowner with no kids yet.

Husband and I both in our early 30s, have very minimal life insurance through work and have around 400k mortgage. No other debts.

Does it make sense to just focus on term life insurance for 20 years to cover the mortgage?

When would it make more sense to get UL?

Thanks!
ohfive,

While we do not know much about you, yes definitely, for income/debt replacement needs, term insurance is the most cost effective purchase for most. The best strategy at this point would be to either a) purchase a term 10 or 20 policy now for the recommended amount (not sure what that amount is so you should definitely have a needs assessment done) to cover your most current needs (mortgage, income replacement, etc) for the foreseeable future. Every 10 or 20 years you can either renew your coverage for another term (will be 2 - 10 times increase) or if you are still healthy, you can reapply for new coverage (the premium will typically be cheaper than taking the guaranteed renewal based on current market trends).

If you want to cover for a longer term, for example if your mortgage amortization is 25-30 years, you could consider a Term 30 or even term to 65 (takes you all the way to retirement). What some people do is every 5 years or so, apply to decrease their coverage to reflect the decrease in debt and increase in savings (becoming self insured) which will translate into a lower premium. The point of this is that it is unlikely that a $500k need today will be a $500k need at age 50 or 60, thus why continue to insure for that amount?

Smartest thing to do is to find a qualified advisor if you do not already have one and they will (should) spend some time discussing your goals, needs, budget, etc as it relates to your family's unique needs. From there they will assess and come up with particular strategies for any gaps in need (needs assessment). They will then recommend products and terms for you.

As for the use of UL, at your stage it is not necessarily a good idea. UL is a type of permanent coverage where your premiums remain constant (should unless it is yearly renewable term) for as long as you keep the policy in force or until you eventually pass. The cost reflects the longer term and risk to the insurer (indefinite need to pay out). Right now your focus should remain on term (income replacement and debt repayment). UL is more for estate planning. If you want, compare costs, but there will be a large discrepancy between the two. You can always change your term coverage to UL or other permanent coverage if need/want arises - of course should your insurance provider offer it.
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wesboag wrote:
Mar 15th, 2017 9:44 am
From what you mentioned, I would agree, if you have no debt and your wife would be comfortable financially for the rest of her life, then by all means it may make sense to cancel your coverage. but with that said, I would be more inclined to suggest you keep your independent coverage over your optional group coverage (assuming costs are relatively the same and if you still want coverage of any amount). Optional coverage (depending of course on a few factors) can be more expensive than individual and will continue to increase in cost as you age - where as the term 20 will not (for the remaining years). Further to this, your individual coverage should have decent conversion options (should you ever wish to change it/convert it down the line) - where as most group coverage is limited as to what you can do with it once you terminate employment or reach a certain age.

Which company is your individual policy with and with what company is your group life coverage? How much do you pay for your individual policy vs the optional group coverage?
Thanks. Group policy is from Manulife while my individual one is from RBC. The group one was covered 1 year salary by my employer so I just bought additional amounts to get it up to ~$500K. Currently it costs $37/month for paying my top up parts and that has already increased quite bit when I passed 50 yrs old a few years back. Earlier it was really cheap
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Your group coverage is only $37/month? or biweekly/per pay cheque? For a 53-54 or so year old, it seems pretty low - much lower than I had expected given your age. If your income is $100k, that means you purchased $400k of optional coverage (correct me if I'm wrong). That's dirt cheap given your age to be honest. Group typically increases in blocks of 5-10 years. Are you aware what the next incremental increase is and when? If its age 55, could be much higher. Have a look through your group benefits booklet. It should tell you in there.
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"Our goals can only be reached through a vehicle of a plan in which we fervently believe, and upon which we must vigorously act. There is no other route to success...."
Newbie
Mar 14, 2017
3 posts
I was currently shopping for life insurance and CI for my family and that when I came across this thread. After learning insurance vs. investment, term and wl, now I am doubting myself what do we really need....
So here let me post my situation, please give me your expertise by all means.
husband - mid 30s, incorporated, $50,000/yr income.
wife - mid 30s, employed, $70,000/yr income.
renting, no house, combined $150,000 saved mostly in RRSPs and TSFAs that we intend to use as down payment for a home in the future.
have a 2 yr old child.

husband is in IT and working very hard and burns a lot of mid night oil, so CI seems to be a good insurance to have.
I understand that I would need a term if we have debt/mortgage upon purchasing a home, incase terrible things happen and we can't afford the mortgage. kid is still very young, and we would like to have some assurance there, but over all, do we really need life insurance right now? if so what kind?
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wesboag wrote:
Mar 15th, 2017 12:26 pm
Your group coverage is only $37/month? or biweekly/per pay cheque? For a 53-54 or so year old, it seems pretty low - much lower than I had expected given your age. If your income is $100k, that means you purchased $400k of optional coverage (correct me if I'm wrong). That's dirt cheap given your age to be honest. Group typically increases in blocks of 5-10 years. Are you aware what the next incremental increase is and when? If its age 55, could be much higher. Have a look through your group benefits booklet. It should tell you in there.
it was for ~ $360K (3x~$120K) and it was bi-weekly deduction of $18.50. Yeah I was surprised too that it was a lot cheaper than my individual policy although like you said, it will probably increase again in a couple of years
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Sep 23, 2013
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fangtasy wrote:
Mar 15th, 2017 4:38 pm
I was currently shopping for life insurance and CI for my family and that when I came across this thread. After learning insurance vs. investment, term and wl, now I am doubting myself what do we really need....
So here let me post my situation, please give me your expertise by all means.
husband - mid 30s, incorporated, $50,000/yr income.
wife - mid 30s, employed, $70,000/yr income.
renting, no house, combined $150,000 saved mostly in RRSPs and TSFAs that we intend to use as down payment for a home in the future.
have a 2 yr old child.

husband is in IT and working very hard and burns a lot of mid night oil, so CI seems to be a good insurance to have.
I understand that I would need a term if we have debt/mortgage upon purchasing a home, incase terrible things happen and we can't afford the mortgage. kid is still very young, and we would like to have some assurance there, but over all, do we really need life insurance right now? if so what kind?
Looking at the information you have given, the most important thing is your income replacement. I'd also consider adding in insurance to cover the mortgage as you seem to be planning a home purchase.

Here's a cookie cutter formula to figure out how much insurance you should have (this is for covering basic needs):

Debts: Expected price range for the home you hope to purchase + any other debts, nothing was mentioned
Income replacement: Husband 50,000 x ,50 x 20 = $500,000; wife 70,000 x .5 x 20 = $700,000
Total: Add the debts with the insurance replacement and you have your total insurance needs.

For income replacement, I only replaced half of the income. There are three reasons why I do this;
1) Life insurance payout is tax-free.
2) Your debts and future mortgage is paid off
3) The surviving spouse would still continue to work and earn an income.


As for how long to cover it, how long do you plan on amortizing a mortgage? However long that is, that's how long you get the term for the debts. As for income replacement, it will depend on your cash flow, but ideally you want to cover that for 20 years.

For critical illness insurance, it would be wise to cover a years income for both you and your spouse. The length of the term here will also depend on cash flow, ideally putting in a plan to age 65 would be the thing to do, but again, you have to consider cash flow. I've recently started using term to 100s for critical illness, just because the chances of getting a critical illness after age 65 increase drastically.
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Nov 13, 2013
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This thread has a lot of professionals who provide good advice based on industry standards. I don't mean to be a jerk messing with their livelihoods but consider that these standards are made by people who have a vested interest in selling the product.

Of course more money after the death of your spouse would be welcome but the trade off is of course less money now. I don't work in the financial industry, but I have experience working with people who have lost a spouse young and many who had followed this kind of advice end up financially much better off after the event. Many no longer need to work again. You certainly don't want to be destitute which especially with a 2 year old could be a real issue but the kind of money you will be spending for the next 20 years on life insurance if invested could be a down payment on a house for your child at adulthood or pay for your child's entire education so you want to make sure the trade-off is worth it.
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Sep 23, 2013
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fogetmylogin wrote:
Mar 16th, 2017 12:05 pm
This thread has a lot of professionals who provide good advice based on industry standards. I don't mean to be a jerk messing with their livelihoods but consider that these standards are made by people who have a vested interest in selling the product.

Of course more money after the death of your spouse would be welcome but the trade off is of course less money now. I don't work in the financial industry, but I have experience working with people who have lost a spouse young and many who had followed this kind of advice end up financially much better off after the event. Many no longer need to work again. You certainly don't want to be destitute which especially with a 2 year old could be a real issue but the kind of money you will be spending for the next 20 years on life insurance if invested could be a down payment on a house for your child at adulthood or pay for your child's entire education so you want to make sure the trade-off is worth it.
You're absolutely right that I do use some industry standards when it comes to insurance planning, you also do see the importance of life insurance. I think where we disagree is the total number recommendation of life insurance. I think you're over estimating the cost of a term life insurance plan if you feel it would have a large impact on a families finances. I will say this and this is just in my experience when people purchase any time of insurance plan, the money that goes towards premiums usually comes out of a person's disposable cash flow. I've never seen someone scale back on groceries, retirement planning or home bills to buy life insurance.

One of the first things I do with people (before getting to insurance planning) is a cash flow exercise. At the end of every month, there is a surplus of cash without an assigned task (unless there is a deficit which is a whole other topic), that surplus is what goes towards the insurance planning. The entire surplus doesn't towards insurance, of course, there are other important financial goals that must be reached. One thing to note, is that after people work cash flow, they started to naturally get a better control of their day to day finances, less money towards things they don't need, and more towards things they do. I've learned that there is a lot of psychology when it comes to managing money.

That's my .02 when people argue that premiums should be kept low because x, y, z.
Newbie
Mar 14, 2017
3 posts
Thank you so much for your reply, SteveDfsin! I know have a clear picture of how much coverage I should get. But I am still unsure if I should get a T20 or a more investment like life instance(WL, UL tec..)
After reading this thread people say if I don't know, i should get the term, because it is easy to convert to permanent later. and we haven't used up our RRSPs and TFSAs room yet, so no need to use insurance as tax shelter either. Should I just get the T20 and the CI for both of us? the advisor who have been talking to me is recommending Equitable Life Insurance, do you know if they are any good and suitable for me?

Thanks again!
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Sep 23, 2013
186 posts
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fangtasy wrote:
Mar 16th, 2017 12:48 pm
Thank you so much for your reply, SteveDfsin! I know have a clear picture of how much coverage I should get. But I am still unsure if I should get a T20 or a more investment like life instance(WL, UL tec..)
After reading this thread people say if I don't know, i should get the term, because it is easy to convert to permanent later. and we haven't used up our RRSPs and TFSAs room yet, so no need to use insurance as tax shelter either. Should I just get the T20 and the CI for both of us? the advisor who have been talking to me is recommending Equitable Life Insurance, do you know if they are any good and suitable for me?

Thanks again!
I'd recommend a T20 for life insurance for the both of you; for CI, it's hard to say what type of CI you should get without a clear picture of your finances, but you should both have it. I wouldn't recommend a permanent plan (UL, Par, WW) at this point as costs would be higher and may eat away at your cash flow. Stick to a T20 and as your insurance needs reduce, you can decrease coverage. As your insurance needs decrease completely, you can start focusing on estate planning and convert some or all of your T20 into a permanent plan or just get rid of the insurance completely.
Member
Nov 13, 2013
314 posts
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SteveDfsin wrote:
Mar 16th, 2017 12:48 pm
You're absolutely right that I do use some industry standards when it comes to insurance planning, you also do see the importance of life insurance. I think where we disagree is the total number recommendation of life insurance. I think you're over estimating the cost of a term life insurance plan if you feel it would have a large impact on a families finances. I will say this and this is just in my experience when people purchase any time of insurance plan, the money that goes towards premiums usually comes out of a person's disposable cash flow. I've never seen someone scale back on groceries, retirement planning or home bills to buy life insurance.

One of the first things I do with people (before getting to insurance planning) is a cash flow exercise. At the end of every month, there is a surplus of cash without an assigned task (unless there is a deficit which is a whole other topic), that surplus is what goes towards the insurance planning. The entire surplus doesn't towards insurance, of course, there are other important financial goals that must be reached. One thing to note, is that after people work cash flow, they started to naturally get a better control of their day to day finances, less money towards things they don't need, and more towards things they do. I've learned that there is a lot of psychology when it comes to managing money.

That's my .02 when people argue that premiums should be kept low because x, y, z.
I really like your response. You make an especially good point about the typical family's cash flow. Most wont even notice a $100 that otherwise would be spent on Latte's etc. Everything is a trade-off.

Personally we max out RESPs (for 2 kids), RRSPs in addition to both my wife and I having a defined pension and we still save 10% of our net income almost every month. This goes directly into an investment account so any additional life insurance would directly reduce the size of this account.

My life insurance adviser was shocked when I said this, but I also know from personal experience that a smaller financial cushion can be a very positive force when overcoming trauma. Being forced back to work can be very beneficial for recovery.
Jr. Member
Nov 16, 2013
188 posts
19 upvotes
I am planning to get permanent life insurance for my son who is 14 year old. As I understand it will be much cheaper to get permanent life insurance for him at this age where I will contribute for next 4-5 years and when he starts earning then he can contribute. I am looking at 1 M policy.

Any suggestions?
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