Is your life insurance costing too much?

Written by Brad Arsenault on Jul. 29, 2014

For many Canadians, the thought of discussing their life insurance protection AFTER the purchase of a policy is unimaginable. It is difficult enough talking about death the first time, why would we want to discuss it again?

Life Insurance is about the living…not the dead

There are several reasons you might want to consider discussing your current life insurance coverage with your insurance advisor on a periodic basis; not the least of which is making sure your existing coverage is cost effective.

Substantial changes have occurred with respect to the pricing of life insurance in Canada. Competitive pressures have lowered the premiums on some products, while low interest rate pressures have increased the pricing of others. There may be significant cost savings available for anyone with life insurance that is more than six years old.

Let’s look at the case of Dave and Donna. Six years ago Dave and Donna were married and purchased term insurance in the amount of one million for Dave, and eight hundred thousand for Donna.  The coverage was inexpensive at the time of purchase and seemed to satisfy their requirements; although an analysis was never completed for them. Dave was earning about $80,000 annually and Donna was earning about $34,000 annually.

ALONG COMES LIFE

After having their second child Donna decided to stay at home to raise the children. Life was going well since the time they bought their life insurance. They had purchased their first home together, Dave had started his own electrical business, and six years later they were expecting the arrival of their third child. They began to wonder if they had enough protection; but they were also concerned what additional coverage would cost, given the upcoming expenses associated with their third child.

Their original insurance policies were scheduled to renew on the Policy Anniversary in the tenth year. The monthly premiums would increase (in four more years) from $72.90 to almost $140. At first glance, this seemed like a reasonable increase. Everything else seemed to have gone up in the past six years; gas prices had increased, the Home and Auto Insurance had gone up, even the Property Taxes had gone up (along with the number of potholes on their street).

It became clear to Dave and Donna that their circumstance had changed dramatically since they last visited their insurance advisor. How would these changes impact their family’s financial security if something happened to either of them? Dave would need a Nanny to help with the children so he could keep the business going; Donna, who is no longer working, would need regular household income for the family; and they both agreed they would like the mortgage paid off so they could stay in the family home.

A simple analysis was completed for Dave that showed Donna would need $1,500,000 if he died tomorrow. She would still need to go to work eventually, but at least she would be able to stay home until the kids finished school. There would also be enough cash available to help fund a portion of their children’s anticipated education costs, and add some savings to Donna’s retirement plan.

Dave on the other hand would need $500,000 if Donna died to support her role in raising the children and maintaining the home, so he could keep the business going in the future. It was always Dave’s intent to keep working, but he could now understand why the coverage was so important to his family’s financial well-being.

As you might imagine, the conversation quickly turned to “What is the cost for this new coverage? We are older now, and we are getting additional coverage on Doug.” By purchasing new coverage, at today’s decreased premium levels Doug and Donna were able to purchase the required coverage amounts for $78.32 per month (an increase of $5.42 per month). The premiums are guaranteed not to increase for ten years, which means they will not have to face the increase that is coming in four years with their current policy. There is even an option to lock premiums in for twenty years if they so choose, at a future insurance review.

It is suggested that an annual review of life insurance be completed every three years, or whenever a major change occurs. Life insurance and a Security Needs Analysis is just one piece of an overall Financial Security Blueprint.

This article was provided by Brad Arsenault of Clark&Arsenault – The Business Succession Advisory. Brad has over twenty years experience working with Insurance and Investment Advisors throughout Western Canada. He can be reached at Brad@ClarkandArsenault.com

Brad Arsenault

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