We've covered disability insurance (EP 011) and critical illness insurance (EP 023). Both pay you while you're alive. This episode is about the one that pays the people who depend on you if you're not.
Chris's starting point is a single question. If you didn't come home tomorrow, what would the impact be? Who would you owe money to, how much, and what would it mean for your family? That's the whole life insurance question. If someone is counting on your income, or you carry debt, you need it, and the question becomes how much and what kind.
Scott's point is that a single person can still have a reason. A first home with a mortgage, student loans, or parents who would have to sort out the sale. Or you simply want to leave something to nieces and nephews, or to a charity you care about. A basic policy for those needs often costs less than people expect.
There's no formula that fits everyone, but there is a place to start. Look at the income your family would lose, what lifestyle you'd want them to keep, and for how long. If both spouses earn, only one income is lost, though the family's total can still drop a lot.
Chris walked through an example. A 35-year-old chiropractor, a spouse who works part-time, two kids under six. They want to provide about $75,000 a year for 20 years, which works out to about $1.2 million. Then they add a $600,000 mortgage, $75,000 of line of credit and car loans, $100,000 toward the kids' education because the RESP isn't fully funded, and the cost of final arrangements, the item that often gets overlooked. It adds up to about $2 million of coverage.
Scott's rule of thumb is that it's now common to see clients needing at least a million dollars to cover the mortgage and income replacement, and that for a high-income doc with a mortgage, two million may be a basic starting point. Chris put the range at one to three million for most people. Treat those as a place to start the conversation, and work out your own.
Your need drops over time. The mortgage gets paid down, every year you age is one less year of income to replace, and your own assets grow. That's why Chris and Scott usually point to term insurance. You're buying cover for the years you have the obligations.
Ten and twenty years are the most common term lengths. Scott likes a ten-year policy because you can revisit it as your needs change. A twenty-year policy is the set-and-forget option, with the same premium for the full term. Some people use both, say a million on a twenty-year policy and a million on a ten-year one. When the ten-year policy ends, the twenty-year one is still there.
Term insurance is sometimes called renting your cover, and Chris was careful about that. It isn't a negative. The best outcome with life insurance is that you pay as little as you can, keep it as long as you need it, and never have to use it. It's the same as your home and auto insurance. If you never have a claim, the money wasn't wasted. It bought the peace of mind.
Insurers price the risk of dying during the term. A younger person has a lower risk of that over ten years than a 55-year-old does over the next ten, which is why the same cover costs far more later. Age, sex and health are the main factors. Young and healthy is the cheapest, and the price climbs from there.
Permanent insurance in Canada usually comes as whole life or universal life. You're insured for a face amount for your whole life, as long as the policy stays in force, and the benefit will be paid at some point. That certainty is why the premiums are much higher. Some policies also have an investment component tied in.
Chris was clear that permanent insurance isn't a scam. It's a legitimate product. Their frustration is with how it's presented. When the first thing put in front of you is insurance wrapped in a tax-savings or investment-growth story, that's a sales pitch and not a plan. Their philosophy is simple. Insurance is for insurance, investments are kept separate, and both should connect to a structured financial plan.
Scott agreed there's a time and a place for it. His rough guess is that maybe 5% of people, after good planning and usually later in their careers, are in a spot where a properly placed permanent policy is the right decision. The thing to watch for is the order: the plan first, and then the policy if there's a need for one.
When you take out a mortgage, open a line of credit or sign up for a credit card, you'll often be offered life insurance, and sometimes disability insurance, on the balance. It's an easy yes, because you answer very few medical questions, sometimes none. The catch, Chris said, is that the lender isn't checking whether you qualify at the time you sign. That can come when someone makes a claim, and a denied claim is the last thing a family wants.
Scott added two more problems with mortgage life insurance. It typically costs a lot more than a fully underwritten term policy. And the beneficiary is essentially the bank, so the mortgage gets paid off and that's the end of it. With a term policy you own, the benefit goes to your family, and they decide whether to pay off the mortgage or do something else.
Chris's ideal outcome is to have proper term life insurance, a professional-level disability contract, and critical illness cover if you want it. Then you can decline the add-ons offered with a mortgage, line of credit or new credit card.
Scott shared a story. When we reviewed one household's bank statements, we found a monthly charge for loan protection insurance that they had forgotten they'd agreed to. They already had good term life insurance of their own, so that charge was covering a risk they'd already covered, and dropping it saved them a couple of thousand dollars a year. If you're well insured through a policy you own, pull your own statements this week and look for an insurance line.
The caution that goes with it: if you're putting new insurance in place, don't cancel the old cover until the new cover is totally active. And if you're not sure you have enough, get that sorted first.
Scott's last point is that this isn't set-and-forget. Review what you have and how much you're covered for at least once a year, or every couple of years. If it's been five or ten years since you looked at your life or disability cover, your life has probably changed enough that you need a different amount. Chris compared it to shopping around your home and auto insurance. It's better to do this on your own schedule than after something has happened.
Chris admitted that talking about insurance can feel like selling, and that buying it doesn't feel great either. But it's a conversation worth having. Make sure you have a plan, then get the right policy for it, and know why you have the amount you have. Scott called it the defensive side of your financial plan. It's less exciting than cash flow and investments, and it's what lets you sleep at night, knowing your family would be okay.
The one thing: work out who would be short if you didn't come home, cover that need for as long as it lasts, and make the plan before the policy.
Listen to episode 055 of The Chiro Money Show →
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