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Sep 1, 2023

Life Insurance Planning Versus Buying A Flat Amount Of Coverage

by Milan Topolovec

This article reviews how you should secure life insurance, professional/executive disability coverage and critical illness.

Perhaps you may want to review how you acquired your life insurance coverage.

When I began my career in the life insurance profession over forty years ago with London Life Insurance Company, we were taught “Family Security Service”, which was a simple life insurance planning service. At that time, my client base came from the family market, all sitting at the kitchen table and sometimes while the family cat hung off my suit.

I decided quickly to educate myself to serve business owners and professionals, which is where my client base now comes from. Life insurance, regardless of product type, can be bought as an amount, for example, $500,000, without any planning taking place. This method can work for things like covering an outstanding mortgage and loans of fixed liability. The problem with this method of securing a “packaged” policy is that it may be too much life insurance or, worse yet, not enough for what your “wants” are.

We have people who call us to buy insurance such as the individual who contacted me last week who was looking for mortgage life insurance and said, “we have never looked at life insurance before and need your help.” Getting quotes for life insurance from all life insurance providers can be obtained with a push of a button on computer software that gets updated monthly.

With the individuals that we work with, there is a Discovery Document they complete which has a needs analysis for life insurance as well their family business information.

You may be thinking completing a needs analysis is a cumbersome, lengthy exercise, which certainly it is not.

I will walk you through the planning analysis and the information you will need to provide to your insurance advisor. 

The immediate needs that you want to cover in case of death:

  • Mortgage Balance.
  • Loans.
  • Burial.
  • Education for children or spouse.
  • Money for charity.
  • Money to support elderly parents.

Remember your monthly income will cease if you die. Considered what amount of continued monthly income that will be required:

  • Calculate 60% of take-home pay as a required amount of income. 
  •  Calculate the number of years you want your spouse to receive this income-example 20 years. 
  • Choose a net interest rate that the lump sum of money must earn to provide the required income.

Next, list the assets that are available to offset the amount of money required to meet your wants;

  • Guaranteed Investment Certificates (GICs).
  • Tax Free Savings Accounts (TSFA).
  • Existing in-force life insurance policies.
  • Stocks and bonds.

Sometimes people ask about Registered Retirement Savings Plans (RRSPs) and the selling the family home which is something we recommend NOT DOING.

This information can be gathered on a single worksheet which can be sent to you to complete, or you can speak with your insurance advisor to complete it for you. Planning your life insurance needs will ensure your loved ones will be taken care of if there is a death. In a business, life insurance protects shareholders and guarantees the continuity of a business.

Professional/executive disability coverage can also be planned out rather than purchased as a package. These coverages are based on your average income for the last two years. Income sources on these policies that qualify for the level of coverage include salary, bonus, and dividends.

The waiting period for these policies is usually 30, 60 and 90 days, before your coverage begins. Shorter waiting times equate to a higher premium. These policies also allow you to add riders for additional benefits, such as:

  • Cost of Living – increases the monthly benefit once disabled.
  • “Own Occupation”.
  • Residual Coverage.

We have a client who is a lawyer and qualified for $14,000 of monthly coverage. However, he wanted to get $9,000 as he felt that this was the net income he and his family wanted to receive at the time of his disability.

I caution people who say, “I will not need as much income because my cost will decrease at the time of disability.” In fact, your costs can increase.

For example: If you become disabled and require assistance of a wheelchair, you may need renovations to adjust to your situation, such as counters that are now too high. You no longer may be able to drive your current automobile without extensive modifications, or you may need to purchase a new vehicle modified for your needs. 

Customizing your disability coverage is what needs to be done to meet your personal needs.

Critical illness insurance, in my opinion, is the best coverage you can get. It is five times more likely to require a critical illness benefit than you dying before age 75. This coverage can be acquired for up to $3 Million dollars maximum with select insurance carriers.

This coverage pays a lump sum benefit after a diagnosis of one of twenty-four covered conditions. Cancer, heart attack and stroke are the most frequent illnesses being paid out by insurance companies.

It is more challenging to calculate the amount of critical illness insurance you should have than life insurance or professional/executive disability. We know individuals who have paid $15,000 a month for cancer medication and other treatments. In the U.S., that can cost $1-2Million dollars. Lump sum payouts from a critical illness policy can be used for whatever you choose.

We suggest working with a qualified professional insurance advisor to “plan out your insurance,” to save you money in the long run, give you peace of mind and leave nothing to chance.

Milan Topolovec, B.A., TEP, CHS, RCIS, CLU, President & CEO TK Financial Group Inc.