Is your group life insurance enough?

Many Canadians have employee benefits plans including life insurance. Do you know how much or the type of insurance you need? Many people do not.

Employee benefits such as health and dental coverage or short-term disability coverage are great and create a win-win situation for the employer and the employee. The employer picks up part or the full cost to get you back to work as quickly as possible and/or to maintain your good health — in return you remain a valuable and productive employee. But what about life insurance? Is it enough? Will it cover all the needs for your family, including cost of living, debts, children’s education, taxes, and final expenses?

Health and disability coverage is designed for you to return to work as quickly as possible or replace the lost earnings. Life insurance replaces the lost income to the household or those that depend on you. It should not be a surprise that employer-provided life insurance only covers a small fraction of the total need.

Meet Sonia Richardson, 39, and Barry Richardson, 42. They have two lovely children. Their annual after-tax incomes are $60,000 and $55,000 respectively. Sonia’s benefits include $190,000 in life insurance. Barry has no benefits. Their mortgage balance is $500,000 and will be paid off over 20 years, and other debts of $75,000 for the two cars and credit cards. They have combined RRSPs of $85,000.

How much is enough?

As a starting point, follow this general formula to find your own target coverage amount: financial obligations minus liquid assets.

  1. Calculate the total of all financial obligations:
    • your annual salary (times number of years to replace income for dependents)
    • your mortgage balance
    • your other debts
    • future needs (education and funeral costs)
    • cost to replace services that you provide (e.g. childcare if you are a stay-at-home parent)
  2. From that, subtract the total of liquid assets:
    • savings
    • existing college funds
    • current life insurance (personal or from your employer)

Please note that your need for life insurance will depend on many factors and should be calculated with the help of a qualified life insurance representative.

Back to the Richardsons… 

Sonia’s total protection need is $1.4 million after subtracting her group life insurance coverage. Barry’s total need is $1.525 million. Keep in mind, the RRSP is set aside for retirement.

Solutions

Most of the Richardsons’ needs are temporary in nature over a 20-year period, except the final expenses. They should consider a term insurance solution to match their temporary needs and a permanent solution to match the permanent needs.

Other ideas

  • Don’t skimp — your income will likely grow over time along with your family’s standard of living. People will only complain if the insurance payout is not enough to meet the family’s needs.
  • Tight budget? Don’t budget on the total need – break up your coverage between 10-year, 20-year, or 30-year term insurance solutions, and permanent insurance solutions.
  • Talk the numbers through with your spouse. 
  • Speak to your life and health insurance advisor, they will be happy to work through your insurance needs with you.

Keep the conversation going

How do you plan on taking care of your children in case something happens to you? Will your group insurance coverage be enough to make those plans a reality? Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

This article is provided for information purposes only and does not constitute an offer or solicitation to buy. The information contained in this article is believed to be reliable, but cannot be guaranteed. Readers are urged to obtain professional advice before acting on the basis of material contained in this article.

About the Author

John Kitcher, CFA, CPA, CA

John is a life and health insurance advisor with Desjardins Financial Security Independent Network. He is licensed in the province of Ontario. john.kitcher@dfsin.ca 613-829-7874 ext. 288