Every individual has a different set of priorities. The average Canadian works, earns an income, and lives the life style they want to live. The one thing that most people have in common is the thought of their children having a solid foundation to build their own families upon. When it comes to estate planning, there are a couple phases in one’s life where they should think about Life Insurance: There is the income/debt protection period, which then transitions into estate planning.
The Income/Debt Period:
The most important years of a person’s life from an insurance perspective, is when the children in a family are between the ages of 1 to 20. This is generally when you have the most amount of debt and the highest exposure to your family’s life going off the rails, if something were to happen to the high income earner. In that time period is when you are going to need the most amount of coverage, while keeping the costs as low as possible. This is where Term Insurance makes the most sense. It is ideal for individuals who do not have a very strong cash flow and want to keep costs as low as possible. Term plans can be bought in 5, 10, 15, 20 and 30 year periods. A good trick for people who want to keep the cost as low as possible in the first few years is to start in a term 10 plan, and then move it over to a term 20 plan in the first 5 years of the contract with no medical needed (many companies allow you to do this, but not all).
When it comes to how much coverage one should be putting in place, most people do not put in enough thought. People often just decide on whole numbers that ‘sound good’. The best way to figure out how much life insurance is needed is to first know what your monthly cost of living is, as you do not necessarily have to calculate insurance coverage purely based on the income level. Once you have determined your monthly cost of living, it is time to calculate how much income is needed each month to sustain your standard of living if something were to happen to the high income earner. For example: A family’s cost of living is $10,000 per month. Partner A earns $225,000 annually as a lawyer, and Partner B earns $20,000 annually as an entrepreneur trying to start a company. They have 2 children, ages’ 6-months and 1-year. It is determined that they have a need for $120,000 of insurance annually for 20 years. Based on this example Partner A should have $2,400,000 of Term Insurance for this time period to ensure if something were to happen the family would be financially stable. The cost of the term 20 coverage would be $96.00 per month for person A (based on a 30 year old female).
As the children in a family grow up and are no longer dependent on their parents, the insurance needs change from Family Protection (the income/debt period) to Estate Planning. There are two trains of thought when an individual reaches this phase: 1. Cancel all, or most of the life insurance as they do not have any debt and have enough of a nest egg built up already, and 2. Keep the insurance for estate planning purposes.
Estate Planning
When it comes to estate planning Whole Life and Universal Life Insurance strategies are the two most common plans for a couple different reasons. Whole Life Insurance is the Rolls-Royce of insurance plans. The plan never expires and the premiums are always fixed. The longer the plan is in place for, the more growth you will see in the plan. With all participating Whole Life policies there is a dividend paid to the policy holder each year. The insured/policy holder then gets to decide how they want to allocate that dividend. There are a few dividend options available. 1. Use the dividend to pay the premium 2. Take the dividend as cash 3. Paid Up Additions. In most plans paid up additions is the option of choice. With paid up additions the dividends every year buy more insurance automatically.
Universal Life is a cheaper cost of insurance than Whole Life and provides a similar benefit. The only difference is that there is no built-in investment component that pays you a dividend. The plan you take out today is the same plan you will own 30 years from now. Within Universal contracts you can pump more money into the plan, which grows tax deferred and will pay out tax free to the intended beneficiary.
When it comes to implementing a permanent insurance strategy, people do it for a number of different reasons. Some use it to simply cover final expenses, while others use it to pass down money to the next generation in a tax efficient manner. Whole Life/Universal Life insurance should be looked at as a way to diversify your investment portfolio. An individual should have a plan in place that they know will be there no matter what happens around them. If people have investments in the stock market, bonds, real estate, etc. insurance should be at least a small piece of the pie. With a Whole Life insurance plan you have an asset that has stable growth and will pay out tax free to your intended beneficiaries. The three main reasons to look to purchase permanent insurance are to cover final expenses, cover different taxes upon ones death (Capital Gains, Probate, etc.), or for a charitable donation.