I am married with kids, how do I protect my family?

By Jennifer Poon, February 1, 2023

We are faced with risks every day, some are minor inconvenience, while some can be deadly. Ultimately we can categorize risks by the potential damages, the amount of damages and our ability to avoid or mitigate the risks. Some risks are unavoidable, and so we can only retain certain risk but manage the potential loss.

While we can try to mitigate the risks of illness and accidents through a healthy lifestyle and taking precautions. Death is inevitable. A sound financial plan considers the financial loss from these potential risks and look for solutions. The most common question I get from families is precisely this, how do I protect my family? How much insurance do I need?

Financial planners use needs analysis to determine appropriate coverage to figure out what solutions are best suited. Perhaps the best way to illustrate this is through a case study.

Steve and Kate have three children, Hank age 6, Emma age 4, and Avery is 10 months old. Steve and Kate both have good jobs with great incomes, they live in a nice house in the suburb and has about half of the mortgage paid off. They are diligent in savings and each child already RESPs started for them.

What can go wrong?

To start we review their combined financial position and quantify the potential financial loss if either Steve or Kate (or both) die or cannot continue to earn income.

· Financial assets and debt

We start with the family’s debts such as mortgage, car loan, credit cards, line of credits, etc. Compare the debts with their liquid assets such as savings, investments, RRSPs and TFSAs. When we look at other assets, what would they sell and what can they keep? The family would like to stay in the house should one or both of the spouses looses income or die. Any debt that cannot be paid off with proceeds from financial and other assets should be provided for.

· Income replacement

If Steve or Kate are unable to earn income because of an illness, disability or death, their current lifestyle would suffer. Hank is Steve’s child from his first mortgage and Hank would likely go live with Hank’s mother if Steve is gone. They should set aside a sum of money to provide for Hank paying to his mother upon Steve’s death. We need to decide how much of their current income would they like to recover should anything happens, in almost all of the cases, my clients typically would like to replace 100% of their current income. There are two solutions here, Steve and Kate can get coverage for living benefits, more specifically critical illness and disability insurance. Critical illness pays out a certain sum if either Steve or Kate is diagnosed with a covered illness, common coverage would cover stroke, heart attack and cancer. This payout would provide for living expense while they recover. Disability insurance allows you to benefit from a source of replacement income when you are unable to work due to an illness or an accident. In additional to living benefit coverage, the need for income replacement would be added to the required coverage for life insurance.

· Emergency fund, education fund and final expenses

We should consider an emergency fund that would pay for unexpected expenses that may arise from time to time. Steve and Kate would like all their children to pursue post-secondary education, the amount of the anticipated cost will be included in the required coverage. We should account for the cost of final expenses.

· Estate taxes

Upon death, all income and RRSP are included as income on the final tax return. All of your assets will be deemed to be disposed, that is capital gain tax would be levied on these assets as if they were sold. Assets that qualify for spousal roll-over can be transferred to the surviving spouse on a tax-deferred basis and final taxes would be paid upon the death of the last surviving spouse. You should take care to review your beneficiary designations on your RRPS, RRIFs, LIRA, LIF and TFSAs and speak with an advisor for advice. In most cases, final taxes are deferred to the last surviving spouse. The amount of estate taxes would be added to the required insurance coverage.

· Legacy needs

Gifts to your children and loved ones, and charitable bequests can also be included in the coverage amount.

Single life, joint life, joint-first-to-die and joint last-to-die, what’s the difference?

Now that you know how much coverage you need, we have to now consider the timing of the required payout. Insurance companies review your health and use actuarial methods to estimate your life expectancy and the amount at risk. The actuaries can consider data on a single life or a blended lives on a joint bases which can translated into a lower premiums for you. Steve is 55 years old and Kate is 45 years old, on a blended basis their joint age may be 37 to 43 (the younger your insured age, the lower the premiums). An insurance advisor would review your situation and select the best product for you. Joint-first-to-die and joint-last-to-die has to do with the timing of when that death benefit is paid out. To cover financial losses that will occur on the death of one spouse, such as providing for Hank’s living expenses, you may want to consider getting single life coverage on each spouse or joint-first-to-die. To cover financial losses that will occur on the death of the last surviving spouse, you may consider joint-last-to-die.

Self-awareness and planning are key

Based on your current cash flow or preference, you may decide you cannot afford the premium or just don’t need the coverage. You can consider term insurance for lower premiums or call your insurance advisors for other solutions. Regardless of our decision, I always recommend families go through this needs analysis for 2 reasons: (1) Awareness of your current financial position, and (2) Awareness and find solutions to your potential financial loss. Awareness is the first step; I encourage you reach out to learn more about how you can protect your family.