Does our young family have enough insurance?

Sammu and Mandy Dhaliwall have 3 kids under 5 years of age. Are they fully covered in case of illness or death?

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Sammu (left) and Mandy Dhaliwall (far right) (Photo by Jennifer Roberts)

Sammu (left) and Mandy Dhaliwall (far right) (Photo by Jennifer Roberts)

In our April 2016 issue of MoneySense, we introduced you to Sammu and Mandy Dhaliwall, a young married couple with three kids from Brampton, Ont. They are trying to juggle RRSPs, TFSAs, paying down their $350,000 mortgage as well as their $90,000 home equity line of credit.  Throughout the year we’ll be giving them a financial challenge every four weeks to help them get their finances in tip top shape. Make sure to follow along! 

Will shopping for mortgage rates hurt our credit score? »

How to juggle RRSPs, TFSAs, RESPs and a mortgage »

Challenge No. 2

Sammu and Mandy were asked to get all the details of their life insurance and disability insurance coverage. With a young family that includes three kids under the age of five, it’s important to keep these policies up to date with changing circumstances. Here’s what they found.

Sammu and Mandy’s experience

We each checked with our individual employers and found that we had the following coverage.

A. Life Insurance with our employer
Sammu: $25,000 (paid by employer)
Mandy: 1 x annual salary (paid at rate of $0.15 for basic life insurance/per $1000).

B. Additional Life Insurance outside work (total paid: $846 per year)
Sammu: $1,500,000 (10 year term)
Mandy: $500,000 (10 year term)

In terms of how much life insurance we need, at this time we feel we probably need about $2 million dollars. We decided to go with a 10-year term since we were both healthy and would accumulate savings and assets over those 10 years that could be used as a cushion for loss in future. If we remain healthy (knock on wood) after 10 years, we can reapply and get a lower premium versus the rollover premium

C. Long Term Disability with our employer:

Sammu: My policy has a cap of 60% of annual earnings, with a max of $10,000 a month. (Note: the first 16 weeks are paid out at Sammu’s full earnings rate). I’m paying $67 biweekly for this.
Mandy: Her policy is capped of 55% of annual salary

We believe our LTD policies cover us if we cannot work with our long term disability. There is no cap on our disability payments from what we understand. Is that possible?

What the experts say

Lorne Marr, an independent life insurance broker, believes the couples needs life insurance for 20 full years. For Sammu, a $1.5 million policy is not enough. “He’d be safe with another $500,000 to $1 million,” says Marr. “He should do it as a Term-20 policy because if all his life insurance policies are Term-10, and his health changes in 10 years, he won’t be able to get cheap coverage.” Marr recommends that in 10 years, when he has built up some assets and his kids are preteens, Sammu can drop the Term-10 policy he has now and keep just the new Term-20. The cost for $1 million of Term-20? About $74 a month, and for $500,000, about $41 a month.

As for Mandy, Marr feels she, too, needs another $1 million. “She only has $500,000 and should also go with $1 million at Term-20,” says Marr. The cost? About $46 a month. “It’s cheap and worth it for that protection at her age.”

The amount of long-term disability insurance (LTD) the couple has is adequate. For Sammu, his $10,000 monthly cap means that if he earned $20,000 monthly, he’d get 60% of this on disability. That would be $12,000 but since the cap is $10,000 a month, he’d only get $10,000. “Still, that’s a healthy maximum for him.”

But Marr has concerns about the type of coverage Sammu has. “He’s covered for “regular occupation” for the first two years and “any occupation” after that. “Any occupation isn’t that good,” says Marr. “If he’s an engineer and can do a teller’s job, then he wouldn’t receive the disability benefit.”

So the amount of LTD for Sammu is adequate but he can do a bit better by buying a private LTD plan that starts with a two-year waiting period and covers him for his own occupation, or “regular occupation” after that.  Alternatively, Marr says Sammu could simply go with a Critical Illness policy that will pay out on top of his present disability insurance plan. “If he did a $220,000 policy, it would replace two years of income,” says Marr. “A 10-year term would cost $73 a month.”

For Mandy, “her long term disability plan is enough,” says Marr.


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2 comments on “Does our young family have enough insurance?

  1. This article provides no justification as to why more coverage is needed, beyond what they already have. Obviously if you ask an insurance broker, they are going to tell you you should buy more insurance.

    Reply

  2. The article reflects good common sense, except that it makes the mistake that is most often made with life, disability and critical illness insurance. The mistake is to pay those premiums in monthly (fractional) payments rather than annually. Most Canadian insurers use a financing load factor of 0.09 to derive the monthly financed premium amount (Blended Principal and Interest). Regretfully, not recognized nor realized by too many life insurance advisors, this load factor represents an effective annual interest rate of 18.6%. Moreover, that 18.6% financing rate is most often paid for with after-tax dollars. An individual, residing in Ontario, and in the top marginal tax bracket would have to earn a guaranteed effective annual return of over 40% (yes, this is not a typo – over 40%) to break even in terms or effective annual interest rate. During the prolonged low interest rate climate, there is no good reason nor justification to pay such a high financing rate of interest. In contrast with laws and regulations relating to consumer disclosure of interest rates for mortgage and other loans, the insurance industry is exempt from such disclosure. If your insurance advisor has recommended that you pay for your life, disability or critical illness insurance in monthly installments but failed to disclose the financing cost rate, is (s)he really looking after your best interests? (pun intended)

    Reply

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