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Abbington Financial Group, 662 Upper James Street, Hamilton, Ontario, L9C 2Z3

 

Tel: 905-389-3534       Fax: 905-389-0345      Email: service@abbington.ca

© 2016 Abbington Financial Group.  Abbington is a registered trademark of Jeffrey Sindall, Abbington Financial Group.

The Circle of Life Insurance

By Jeffrey Sindall

 

For a family, the need for life insurance on the parents arises from the following possible financial objectives:

 

1.  Have enough money to pay fully the mortgage and other debts to relieve the family of these payments.  Note: while mortgage interest rates are low it is actually better to continue with the mortgage.  Instead invest the money received from life insurance then draw a monthly income for the mortgage payments.  Note: mortgage insurance1 is not recommended (see below).

 

2.  Allow the surviving spouse a sum of money to take a leave of absence from work for a few months if needed.

 

3.  Have a sum of money to fully meet the children’s education goals.

 

4.  Have a sum of money to fully fund the surviving spouse’s retirement.

 

5.  The most important objective and greatest need is to have a sum of money (often called an “income replacement fund”) from which to draw a monthly income to meet the family’s regular living expenses (which may include new child care expenses).  This income should continue, indexed for inflation, until all children are financially independent.

 

6.  Payment of funeral service expenses.

 

7.  Contributions to charities, if desired.

 

8.  The establishment of a long-term family trust fund to benefit children and grandchildren.

 

A key concept is that the amount of money required to fulfill these objectives changes as time passes, and therefore the needed life insurance coverage changes as well; it typically goes down.

The blue bar chart illustrates from left to right how one’s life insurance need may change over time.

 

At the far left, there is very little need for life insurance on a child.

 

For young adults (and those young at heart) the following three life events may occur for different people in a different order.  In this example,

 

a)  Marriage (or living common-law) occurs first and may cause some need for life insurance if desired by the new couple.

 

b)  Buying a home and assuming a mortgage typically increases the life insurance need as most couples would prefer the surviving spouse be able to keep the home.

c)  The highest need for life insurance occurs when parents are expecting a child who will be their last/youngest child (see objective 5 above).  The sum of money required just to replace one parent’s take-home income for 25 years (indexed for inflation) typically exceeds a million dollars!

 

As the years pass presumably2 the mortgage and other debts are gradually paid, children’s education goals are gradually funded with RESP contributions, and the children themselves get older and closer to financial independence.

 

During the parents’ retirement the need for life insurance is much less (there may still be objectives to have life insurance pay for income tax liabilities, funeral expenses, charitable contributions, and create a family trust for descendents).

 

The red line shows how the parents’ investments would i) grow while working, and then ii) during retirement may be drawn down.  There may be a point at which time the parents become self-insured, meaning they have enough investments to meet all of their remaining financial objectives (assuming they continue to work until their expected retirement dates).

 

At Abbington Insurance we conduct family financial reviews including a life insurance needs analysis to determine parents’ life insurance needs today as well as estimate how life insurance needs will change over time.  Then we recommend a decreasing term life insurance policy with the correct initial coverage amount and the correct duration.  This type of coverage has low premiums.  Our clients save money, invest the difference, and plan for the best!

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1 Mortgage Insurance:  Jeffrey Sindall DOES NOT recommend mortgage insurance because 1) the premium is typically more expensive, 2) there is no guarantee that a death benefit will be paid in the event of a claim, and 3) the death benefit would be paid to the mortgage lender regardless if the surviving family members need the money for some other purpose.

 

2 Presumably debts are paid down even if a larger home (larger mortgage) is acquired.  However, a critical illness, disability, or injury may derail this assumption.  If a parent is unable to work and/or requires expensive medical care then the family’s finances would be at risk.  Critical Illness and Disability Insurance should be acquired and remain in force to protect the family’s wealth and lifestyle!

 

© 2016 Abbington Insurance