There are several advantages of company life insurance:
- It’s usually low cost.
- You’re typically covered as soon as you join the company or after a specified waiting period.
- You’re guaranteed to be accepted (up to the maximum amount allowed without completing a medical questionnaire).
- It’s easy to apply for.
Not surprisingly, workplace life insurance is popular. Over 60% of Canadians who have life insurance coverage get it through their employer. However, this next stat is where the issues start: over half of those people only have company life insurance.
Given that workplace life insurance coverage is typically limited, most people have inadequate coverage. Let’s take a look at how much life insurance you actually need and what your life insurance options are.
Why you could need more than your company life insurance
Workplace life insurance coverage is typically the equivalent of one year’s salary — two year’s salary if you’re lucky. Let’s imagine that you earn $50,000 per year, and that is the amount of your company life insurance.
Even if you’re single and living in rented accommodation, there are still plenty of expenses that this amount might have to cover, including:
- Your funeral: Canadian funerals cost around $9,000, on average.
- Your debts: you’ll need to have enough to pay off your debts to avoid your family members from having to cover them. These include credit card balances, car payments and other loans.
- Housing costs: you may be on the hook for one or two months in rent as well as removal costs to empty your home belongings.
If you own a home and/or have a partner and children, your life insurance needs would be considerably higher. When choosing life insurance, many people want to ensure that their insurance payout will be enough to:
- Pay off their mortgage and other debts.
- Replace their income for a set number of years.
- Cover ongoing costs for home repairs and maintenance.
- Pay for their kids’ education.
Clearly, one year’s salary isn’t going to cover all of this.
Another concern is that company life insurance isn’t as stable as privately held life insurance. If you lose your job, your life insurance coverage could cease almost immediately. Also, if your health has deteriorated over recent years, you might not be able to buy the coverage that you need.
So, how much life insurance do you need?
This very much depends on your and your family’s personal financial circumstances. There are some general rules that are often suggested, such as having coverage that’s equal to 10-20 times your annual salary, depending on interest rates. Another rule suggests that you need a multiple of your salary, plus $100,000 per child (to help cover their education costs).
These are all very general rules, however, and don’t take into account your unique financial circumstances. Someone who’s paid off their mortgage, for example, might need considerably less than someone with a $500,000 mortgage. Similarly, someone with three kids will likely need more money than someone with no children.
You can get a more accurate idea of how much you should have in life insurance coverage by examining your family’s future financial needs and potential lost revenue. Here’s how you can start calculating a more accurate sum of money you’ll need from your life insurance coverage:
Your mortgage: many people want their life insurance to completely pay off their mortgage, so their family have a secure home and don’t need to worry about making mortgage payments.
Your debts: you may want to pay off any large credit card balances, car loans, personal lines of credit and other large loans with your life insurance coverage, so these should also be included.
Your children’s education: if you have kids, you may want to make sure they have enough to cover their tuition fees and/or living expenses. Remember to subtract any savings already in RESPs from the amount you’ll need.
Your salary: calculate how much net (after-tax) salary you’ll need to replace, and for how many years. From this amount you can deduct mortgage and debt payments, as well as your kids’ education costs, as calculated above.
Your final tax bill: when you die, your estate will have to pay any outstanding taxes you may owe at the end of the tax year.
Your funeral costs: while the average cost across Canada is around $9,000, a local funeral home can give you a more accurate quote for your city.
Savings: factor in any savings and investments you may have and deduct them from the total life insurance coverage needed (this should include TFSAs, RRSPs and any non-registered savings and investments).
Which non-company life insurance options are available?
There are two main kinds of life insurance that you can take out to supplement your company life insurance coverage:
Term life insurance: this lasts for a specific amount of time, for example 10 or 20 years, and is designed to provide substantial coverage, at a relatively low cost, at a time when your family needs it the most (for example, while you still have a mortgage and growing kids).
It provides your loved ones or chosen charities (your beneficiaries) with a tax-free payout if you die during the term period. Your payments are fixed for the whole term. At the end of the term you can convert it to a longer term or switch to permanent life insurance.
Permanent life insurance: this covers you for the rest of your life. While it’s usually more expensive than term life insurance, it is cheaper if you start it when you’re young.
The cost of life insurance depends on your age, health, gender, occupation/hobbies and if you’re a smoker. For example, someone who works at a desk and enjoys playing euchre would be considered less of a risk than someone who puts up scaffolding and goes heli-skiing in the winter.
Life insurance is usually calculated per $100,000 of coverage. Age has a big impact on the cost of life insurance: for example, a healthy, non-smoking 50-year-old would probably pay around twice as much in premiums for term life insurance as a healthy, non-smoking 30-year-old.
How to choose the best non-company life insurance
Your IG Advisor will be able to look at your life insurance needs from the perspective of your whole financial plan. They’ll complete a needs analysis with you and use our specialized software to work out how much life insurance coverage you should ideally have, on top of what you currently get from your company life insurance.
They’ll also be able to recommend whether term or permanent life insurance makes more sense for your unique situation. And they’ll ensure that your life insurance fits into your financial plan; that it’s affordable and that it will keep your family financially secure in the event of your death
If you only have company life insurance, contact your IG Advisor to set up a meeting to discuss how much life insurance coverage you should ideally have, and the options available to you. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).