Many parents rely solely on the life insurance provided through their employee benefits. This is very concerning to me as an advisor. Most Group Life plans offer minimal coverage, sometimes only $25,000.  While this will cover final expenses, it wouldn’t be sufficient to replace one’s income for their family.

The reality is that many parents have costly life insurance products, rather than the more affordable term life insurance, explaining why many say they haven’t bought life insurance because it is too expensive. Most families these days don’t have a lot of extra income at the end of the day, so choosing the right insurance can be vital – which is why I want to highlight four common mistakes when it comes to coverage.

Mortgage Life Insurance

Not only is it more expensive than term life insurance, it protects creditors who receive the payout to cover the balance of a mortgage, not the family. Not to mention, if you were to switch mortgage providers, the mortgage life insurance wouldn’t automatically transfer over with you.

Permanent Life Insurance

Term Insurance is for “IF” you die, Permanent Insurance is for “WHEN” you die.  Ask yourself, are you looking to purchase insurance to protect your family or to transfer wealth or preserve your estate for the next generation or charity?  The purpose of Term Life Insurance could be to cover the cost of the funeral, pay off all debts and provide enough income to support the family until the kids are no longer financially dependent.  Personally, I would only consider permanent insurance after your term life and disability insurance needs are adequately met and you feel that you have excess cash flow to start planning a legacy for your children or to take care of an estate tax liability.  Permanent Insurance is significantly more expensive than term insurance, it’s not uncommon to pay 10x or more for the same amount of coverage.

Life Insurance for Children

The strategy some promote is to use a cash-value permanent life insurance policy as a way for parents to put money aside for their children. Typically, one would be better off to have an RESP given that the government will match up to 20% of any RESP contribution up to $500 per child, per year.

It may make sense to have a bit of life insurance on your child, however that could be in the form as a rider on your term life insurance policy.  This rider is much less expensive than investing into a permanent policy on your child and can be used to cover final expenses.  In addition, once your child becomes an adult and no longer a dependent, they have the ability to increase coverage and convert to their own policy with out any medical underwriting.

If a family is wealthy, then we could look at life insurance on the children as a way to transfer wealth from one generation to the next.

Group Life Insurance

A number of working parents have group life insurance, or life insurance as a work benefit through their employer. While it is a great benefit to have, it may not be enough coverage on its own. I would recommend seeing this as more of a complementary partner to a more robust term life policy. Group life insurance typically covers one to two times an individual’s annual salary, so it won’t often provide enough income protection for most families if future pay cheques suddenly stop coming in.

Have questions? Please don’t hesitate to get in touch and I will help you find the product that is right for you.