Hello my fellow Burlington Dads!
Recently, there has been some media coverage about life insurance offered through major Canadian banks (click to see Globe & Mail Article). I thought that I would provide a bit of insight on the subject to make sure our Burlington Dad’s better understand the products offered from banks. If you prefer to watch a CBC Marketplace video, click here.
Did you know?:
- “The Bank Act” is very clear about Canadian banks not being able to sell insurance products. To get around these rules, banks are allowed to offer ‘creditor insurance’ against loans given by the bank. Creditor insurance is the most profitable product a bank has to offer
- Creditor insurance is often far more expensive than private insurance (I have an example below using Scotiabanks posted rates)
- Creditor insurance premiums increase every 5 years (see below)
- The beneficiary of creditor insurance is the bank (not your family)
- The amount of coverage reduces (as your mortgage reduces) — in other words, the product gets more expensive as you age, but the amount of coverage reduces
- Medical underwriting is completed post-mortem (ie. after you’re dead). Therefore, the benefit may not be payable because of poor health (even though you’ve paid premiums for years)
Private life insurance coverage you purchase through a broker/advisor has guaranteed costs (10, 20 or 30 years). The coverage never reduces. The beneficiary is your family (not the bank). Also, since medical underwriting is required up-front, 99.8% of all claims are paid.
How do I know if I have creditor insurance?
Each lender/bank has their own online services. At Scotiabank, when you login to your online banking, it clearly shows if you are insured and the costs for life, critical illness and disability. See a screenshot below:
How much does creditor insurance cost? How does it compare to privately owned insurance?
I googled “Mortgage Insurance rates” and was sent to this link. Below is a screenshot from that page:
Life Insurance Example: Assume a mortgage of $500,000
- Age 35: $750/yr vs. 10 Year Term $255/yr
- Age 40: $1,100/yr vs. 10 Year Term $350/yr
- Age 45: $1,650/yr vs. 10 Year Term $535/yr
- Age 50: $2,200/yr vs. 10 Year Term $766/yr
- Age 55: $2,750/yr vs. 10 Year Term $1,300/yr
- Age 60: $3,700/yr vs. 10 Year Term $2,231/yr
- Age 65: $5,450/yr vs. 10 Year Term $3,957/yr
Protecting your family is what’s most important. Replacing your mortgage insurance with private coverage is an absolute no-brainer for everybody.
Direct Line: 1-(289) 644-2345
Cell Phone: 1-(905) 330-2366 (text to this number)
For the past several years I have met with hundreds of advisors. Some of these advisors have a difficult time having the “insurance discussion” with their clients. Others are only comfortable with the idea of using life insurance instead of mortgage/creditor insurance with their local bank.
There is a very simple method of going through a life insurance needs analysis. There are two distinct steps:
- Do the Math
- Do you care?
Do the Math
There are 3 main factors that determine a term life insurance needs analysis. Never forget these three:
- Debt Elimination (mortgage included): This number is very easy. How much debt do you currently have as a family? If one spouse were to pre-decease the other, ideally, this expense would be eliminated
- Education Costs for Children: The question I ask to every family is, “how much do you think education will cost for your children?” — there is no ‘right’ answer, but based on the education cost calculator provided by MacKenzie Financial, for 4 years of school plus living expenses, based on Ontario costs and inflation rates, will cost approximately $80-100,000/child (present value).
- Income Replacement to your Family/Surviving Spouse: Let’s assume that after death, your surviving spouse has no more debt, no need to save for education AND a family without a spouse/parent. Things are much different. To me, you should want to calculate a certain level of income for as long as the children live in the house (let’s say age 20). Below is a table that I created many years ago. The top row is the number of years to replace income and the column to the left is the after-tax amount of income provided. I literally print this table and allow client(s) pick their own number.
Let’s do an example:
Bob and Susan have a $500,000 mortgage and two young children (2 & 4). Susan stays home with the kids and Bob earns approximately $100,000/yr gross (after-tax $70,000/yr). What happens if Bob dies prematurely:
- Debt: $500,000
- Education: $200,000
- Income Replacement ($40,000/yr for 20 years – see table): $676,000
- TOTAL NEED FOR INSURANCE: $1,376,000
- Less: Current Insurance
- Less: Current RESP’s
- EQUALS: TOTAL SHORTFALL
Do you Care?
As a professional, my job is to show the math and explain where life insurance fits.
However, as a client, you may not “care”. You would be surprised how many times I’ve been told that, “we’ll just sell the house”. My response to that specific objection is, “let’s me get this straight…Dad dies, mom has no husband, there is no more paycheques and the solution is to uproot the family from their home? Really?”
My job is to make sure we have this awkward conversation and for me to challenge these conventional objections and help better educate. Not everybody has to be a believer, but ALL advisors should have this conversation with their clients.