Who needs $1000000 of whole life insurance? How about a million bucks of term? How many of us really need this sort of protection and what type of life insurance makes the most sense when you reach these figures? Seriously what’s the deal here!?
Life insurance is one of those products that no one likes to talk about – I think it has to do with the whole death thing. Sure we all know it’s an inevitable part of life, but it’s not a topic we like to bandy about.
The thing is, adequate coverage is so important for you and your family. That’s why you need to crunch the numbers to see what you REALLY need to keep the ship afloat.
I think the following information is going to surprise you, my friends, because these numbers aren’t so crazy after all!
I'm James Heidebrecht - The Founder of Policy Architects
…and I love life insurance. This isn’t just because I’m an agent either. There’s nothing better than working with families across Canada to make sure they have the proper coverage to protect their loved ones if a worst case scenario unfolds. My wife and I have multiple policies to insulate us against a catastrophic event because we have small children – and a lot to lose if everything falls apart.
Yeah, we all assume something tragic won’t happen – otherwise, it’s tough to get through life. But the thing is it can and on occasion does. Kym and I both have close family and friends who have gone through horrendous situations and failed to plan. Sadly not everyone has a support network or a well-funded go fund me campaign to get through it unscathed.
“Your death should be a time of celebrating your life – not a time for your loved ones to crowdfund asking for donations toward the final expenses that you failed to properly plan toward.” MJ Harris, HuffPost, GoFundMe is Not Life Insurance
That’s why I’m here. To explain life insurance in simple and easy terms and walk you through an otherwise confusing process. So let’s find out a little bit more about why you might need $1000000 of whole life insurance…or term!
$1000000 of Whole Life or Term: $1 Million Bucks is a lot of Dough!
Bam! $1000000 of whole life insurance…or term is a LOT of coverage. This a figure most of us don’t expect to see in a lifetime so it’s ridiculous to think anyone needs this sort of coverage except the rich and famous? Right?
Wrong! Absolutely and utterly wrong. While $1000000 million in coverage isn’t necessary for everyone, my bet is more of you need it than you know.
The thing is life is expensive and it’s not getting any cheaper. While $1000000 seems like a lot of cash – when you crunch the numbers it’s a lot less than you think.
The rule of thumb is that you should maintain between 6 – 10 times your annual wage in coverage to safely protect your family.
So Let's Crunch Some Numbers in Real Time
If you live in Toronto, right now the average salary is $60,000 per year.
But let’s say you’re the primary breadwinner and make $100,000.00. In order to safely replace your income at the low end, you should maintain at least $600,000 of coverage and on the high end, you should maintain $1,000,000!
If you make more than $100K you definitely fall into this category. Remember, you have to take all your debt into consideration as well. So your lifestyle and financial condition play a big role. That figure can quickly go up depending on your circumstances. This is why I do a needs analysis to show my clients where they REALLY stand.
Remember, you want to make sure you provide enough money for your family to continue to live the lifestyle they have become accustomed to…
…without having to sell the house.
One of the best parts about life insurance is the claim is paid out tax-free. However, if the life insurance proceeds are invested, you have to pay tax on any interest earned.
So let’s take a look at an example for better understanding:
How Long Will My Life Insurance Proceeds Last?
$500,000 of Life Insurance
Kevin, who is 42, earns $100k annually and has a $500,000, 20 year term life insurance policy with Empire Life. He purchased the policy when he was 37 and his monthly cost is $40.50. If he dies unexpectedly, how long will his life insurance proceeds last his wife Karen and their two small children?
For this example, based on average and marginal tax rates, Kevin's net income (after tax) is approximately $71,000.
This is the amount of money his family needs to continue living the same lifestyle they are accustomed to. For simplicity's sake we'll leave interest and inflation out of the equation.
$500,000 (Insurance Proceeds)
$71,000 (Annual Net Income)
Kevin's family will use up his life insurance proceeds in just over 7 years!
NOTE* If Kevin's family put the $500,000 in a payout annuity earning 5% interest and subject to 2% inflation, it would pay out $5900 monthly (equivalent of $71,000 net income) for 8.7 years. The $115,000 of interest earned over the 8 years would be subject to taxes.
I know what you’re thinking. That’s pretty good, 7 years of cash to keep the family going – better than 5 years, 2 years or nothing! True, some life insurance is better than nothing but what happens when the money runs out after 7 or even 8 years?
Will Karen, a stay at home mom, have the time to get a job or go back to school to upgrade her skills so she can earn the money to replace Kevin’s income…
…all the while taking care of her family?
What happens when the children reach the age where they can go to University or College? Will Karen have the money to help them out or will they struggle with student debt? Will she be able to keep up with inflation and the rising cost of food, clothing and health care?
I know what some of you may be thinking - don't touch the principal!
Ok, let’s say Karen invests the $500,000 and tries to live off the interest so she can keep the principal intact for her children’s legacy. Smart idea. In reality, even if she earned 6% on the $500,000 after inflation, that would amount to approximately $30,000 annually or $25,000 net after income tax.
We can all agree it would be almost impossible for her to make that leap without dipping into the principal and eroding the money she earmarked her kids future. Even if she were able to get a job right away and cobble together a $60K or $70k net income, she would have to hire or get someone to help her out with childcare – and we all know how expensive that can be.
The sad thing is, it would have only cost Kevin $30-35 more per month to have $1 million of coverage vs $500,000.
Ok, let’s try this again.
$1,000,000 of Life Insurance
Kevin, who is 42, earns $100k annually, now has a $1 million, 20 year term life insurance policy that he purchased when he was 37 years old. His monthly cost is $72.90. If he dies unexpectedly, how long will the policy proceeds last his wife Karen and their two small children? As in the previous example, based on average and marginal tax rates, Kevin's net income (after tax) is approximately $71,000. This is the amount of money Karen and the kids need to continue living the lifestyle they are accustomed to. To keep things simple, we'll leave interest and inflation out of the equation.
$1,000,000 (Policy Proceeds)
$71,000 (Annual Net Income)
Kevin's life insurance proceeds will last Karen & kids for over 14 years!
NOTE* If Kevin's family put the $1,000,000 in a payout annuity earning 5% interest and subject to 2% inflation, it would pay out $5900 monthly (equivalent of $71,000 net income) for 23 years. The $676,000 of interest earned over the 23 years would be subject to taxes.
It's Amazing The Difference $32.40 a month can make!
This is a different reality altogether! Karen knows she can count on Kevin’s income for at least 14 years. Can you imagine the sense of security she feels? She doesn’t have to rush out and get a job or make any financially binding decisions while she’s emotionally devastated. She can take her time grieving and be there to provide help and support for her kids. She knows money’s coming in for the long term – guaranteed.
She can wait until the kids are in school full time before deciding whether she’ll return to the workforce or try her luck with a home business. Don’t get me wrong she is not out of the woods financially. Karen has to be smart about what she decides to do but she does have more options and breathing room. And what was the price? An extra $32.70 per month.
What if she decides not to touch the principal and live off the interest?
Even If Karen generates 6% on the $1,000,000 after inflation, that would amount to approximately $61,500 annually or $46,000 net after income tax. living off of $46,000 vs $71,000 is going to be a challenge but it’s a heck of a lot better than $25,000 per year. We can all agree it will still be hard for her not to dip into the principal and erode the $1 million she set aside for the future. But it will be a lot easier for her to cobble together a higher net income knowing she has $46,000 coming in no matter what!
This illustrates how even $1,000,000 isn’t a lot of money when it comes to providing for a family long-term, especially if you’re living in one of Canada’s more expensive cities.
People's Financial Reality is Quite Shocking
One thing that never ceases to amaze me is people’s lack of awareness of the cost of their lifestyle. Houses are increasingly expensive and families take on record debt in Canada to sustain their way of life.
Two trillion dollars of debt is a big number. Let us try to put some context around it. A common way to measure household debt is to compare it with the amount of disposable income people have. In Canada’s case, household debt is around 170 per cent of disposable income. In other words, the average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes.
That ratio is a Canadian record, and up from about 100 per cent 20 years ago.
Now that’s a hard pill to swallow but it’s a reality.
So when I sit down with couples to discuss their plan, more often than not they’re quite shocked to see that $500K policy they are eyeing is woefully inadequate to provide the protection they envision.
This is where I feel really good about the contribution I make. This reality check helps them reevaluate everything, including their estate planning goals. It’s a good feeling to know I’m helping people create a better future.
$1000000 Whole Life Insurance OR Term
You may or may not know this but there are two types of life insurance: term and permanent. Within these categories, there are numerous options, but this is the basic structure.
Term Life Insurance
Term life insurance is pure income protection. This is the drill:
- You select a policy face value such as $1,000,000 (lower and higher amounts are available)
- Choose a term such as 30 years (you can dial this down depending on need)
- Get a physical
- An underwriter assesses your circumstances and gives you a rating that determines how much you spend on your premiums
At Policy Architects we love term! This is because it’s flexible and super affordable. Especially if you buy it when you’re young and healthy. In my experience as a life insurance agent, term works best for most people most of the time.
Whole Life Insurance
On the other hand, permanent life insurance (whole life is a permanent product) protects you until the day you die and typically has a cash accumulation feature. The process is the same as term UNLESS you choose a guaranteed issue or a no medical exam policy.
Whole life insurance is a great tool, but it’s far more costly because the payout is guaranteed as long as you pay your premiums in a timely manner.
Sadly a lot of people get involved in whole life policies and can’t afford to maintain them. So they lose the money they spent over time and are left without coverage. I only recommend permanent products to those who have enough money to use them to their advantage. Typically these are people with estates who have tax shelter requirements, those who have to care for people with special needs or business people who have investments to protect.
If you want to learn more, check out my post on Cash Value Life Insurance here.
An exception to the rule is final expense life insurance. This sort of whole life policy works a charm for people planning their end of life costs. It’s affordable and fits just about anyone’s budget.
My personal opinion is – life insurance isn’t an “investment” per se. If you’re looking for a good return on your savings there are better places than life insurance to park your money. But that’s just my take on things. There are others that disagree.
$1000000 of Whole Life Insurance
Whole life insurance is a real commitment and even more so if you purchase $1 Million in coverage. If you happen to fall off the wagon you will lose a substantial investment. Actually, this is a real problem as many people opt out before their beneficiaries see a dime. It’s one of the many reasons I think term works better for most people, most of the time.
There are however times when whole life works well for people. If you have a substantial estate you may want to take a closer look at this product.
To give you an idea of how much a whole life policy costs in terms of monthly premiums, I’m sharing a chart. As you can see this is a huge financial commitment.
Rates below are for Equitable Life of Canada, Equimax Participating Whole life, Standard Health Class, Non-Smoker
*Quotes above are monthly rates for Equitable Life’s Equimax Participating Whole Life, Standard Health Class and non-smoker. Your rates may differ depending on your unique circumstances. May 2019
$1000000 Term Life Insurance
As I mentioned above, term life insurance is very affordable and many professional families need this much coverage to adequately protect their loved ones. If you make over $100K per year, then this is a very realistic amount of coverage. Here’s a little more insight into how affordable term insurance really is.
Let’s start with a young, healthy male that’s planning to have a family. He just graduated from medical school and is purchasing a house and has a $700,000.00 mortgage. He’s 32 years old and currently makes about $110,000. From the numbers, you can see this client needs $1000000 or more in coverage. Thankfully he’s young and healthy and receives a preferred rating. How much are his premiums?
I urge him to take a 30 year term because once he’s locked in his family is protected until he is 62 years old. This means all the most vulnerable periods in his life are covered at an incredibly fair rate. BMO offers a monthly payment of $87.75! Wow, now that’s fabulous. The best part is, even if he gets sick his payments remain the same.
Your Age Matters
Well, the numbers speak for themselves. When you’re young and healthy term life insurance is super affordable. But what happens if you get sick…
Underwriters are the people who assess the risk a life insurance company takes on when they offer you coverage. So when you age the cost to insure you increases. This is because you’re closer to death and you run a greater risk of dying during the term – which means they may have to pay out.
To give you a little more insight into this let’s look at a potential client.
Our first example is a woman. She’s in terrific shape but unfortunately, she put off buying a life insurance policy until later in life. She made a great deal of money in her hay day and didn’t think it was necessary. The thing is she quit that peach of a job and just launched her own company. While her mortgage is paid up she took on a ton of debt to start her business. She has partners and feels she needs $1000000 in coverage to protect them and her employees. She is 52 and is looking for a 30 year term. She opts for Sun Life because they offer her coverage at $370.35 per month. Wow, quite a difference from our 32-year-old doctor. The thing is she is covered until she is 82. Not too shabby.
...What About Your Health?
For this example, I’m using a younger person. I have a 38 year old woman who has controlled high blood pressure. She’s in average shape and is worried she’ll be rated. Thankfully she received a standard rating from Empire Life. Hey she works with Policy Architects so she found the right company 😉
She’s a lawyer and makes a pretty penny, has a $500K mortgage and couple of kids to take care of. She chooses $1000000 in protection to assure her family can maintain the lifestyle they are accustomed to. Her premiums are $118.80 per month. If she was in exceptional health and got a preferred plus rating she pays $90.90 per month. This means over her 30 year term she saves $10,044 because of her preferred rating.
If our client smokes these premiums skyrocket! Empire charges her $270.90 per month! That’s $54,756 MORE over the course of her term.
This is because smoking is very bad for your health and underwriters know this.
Creative Tools for High Value Life Insurance Policies
As you can see $1000000 in whole life insurance is going to cost you a bomb and is completely unaffordable if you don't have an estate to support the premiums. This is why term life insurance is such a gem. You can protect your family during your must vulnerable years for very little money.
...but if you do happen to have a chunk of change a permanent policy can really help you maximize your estate. Check out some of these money saving strategies:
Immediate Financing Arrangement (IFA) To Leverage Cash In Your Business
Whole life insurance policies are VERY expensive. So it’s not a surprise when people who have extra cash in their corporation are reluctant to tie it up paying life insurance premiums. Well, there is a solution. You can use a premium financing strategy known as an Immediate Financing Arrangement (IFA).
How does it work? Basically, you dump a big chunk of money from your business into a cash value life insurance policy. Your policy is linked to a line of credit from a Canadian bank or life insurance company. Using your policy as collateral, you’re allowed to borrow up to 90% of the funds back and use them to operate or invest in your business.
The best part?
You get a tax deduction on the life insurance premiums and on the interest paid on the line of credit. Since you’re not actually taking money out of your policy, the investment account continues to grow as does the borrowing cap on your line of credit.
If you're looking for tax strategies this approach is very useful.
Instead of liquidating assets you can leverage your wealth to purchase a policy you would otherwise be unaffordable, potentially offsetting capital gains, gift taxes, and estate taxes…
that is if you use this tool properly.
Buyer beware. These loans are often variable which means if interest rates skyrocket so will your payments. Sadly, if you’re unable to weather the storm the lenders may go after your personal assets. There is light at the end of the tunnel though. You can purchase a term insurance rider that enables you to increase your death benefits to cover increases in the loan balance.
This is a complicated approach and you should consult a trusted financial advisor before embarking on this path.
Pay Your Premiums Annually and Over a Shorter Time Period (8, 10, 20 Years)
Financing your premiums annually and paying the policy up in the shortest period of time contributes to much higher growth in the investment account of your policy.
The quicker you get the money in, the sooner it starts compounding and earning interest and dividends. For example, say you have a $1 million, 20 pay, Whole life policy. By year 25, paying annually could easily result in a 5-12% increase in cash values.
*NOTE obviously this subject to the performance of the participating investment fund of the policy
An Insured Retirement Plan (IRP)
Another tool that can be used is an Insured Retirement Plan (IRP). This is similar to an immediate financing arrangement in that you are borrowing money from your life insurance policy. The difference? Instead of using it for business purposes, you’re using it to help supplement your retirement income.
You’re also building up the investment account in your policy over a longer period of time to enjoy longer-term compounding and growth. It doesn’t offer the same tax deductions when it’s personally owned but it does offer tax-deferred or even tax-free growth depending on how the proceeds are disbursed.
This is a strategy for high net worth individuals who have exhausted traditional retirement vehicles such as RRSP’s, TSFA’s and unregistered investment accounts. During high-income years, you dump excess cash into a whole or Universal life insurance policy. Over time the investment account in the policy experiences substantial compounding and growth. Upon retirement, instead of withdrawing cash directly from the insurance policy, you borrow money through a line of credit attached to the policy. This LOC is usually affiliated with a Canadian bank or life insurance company. Because loans are NOT taxable under CRA rules, no income tax is triggered.
You’re eligible to borrow up to 90% of the cash value in your policy and the LOC can be capitalized so you make no payments at all while you’re alive. Because you’re not taking money directly out of the policy, it’s investment account remains intact and continues to grow. This can result in an increase in the amount of cash you’re eligible to borrow from the LOC.
When you die, your life insurance proceeds are used to pay off the loan balance and any interest owing. Any funds left over are paid directly to your beneficiaries, tax-free, bypassing probate.
Why You Should Call Policy Architects Today!
So I guess the question comes down to, “Do YOU Need $1000000 Whole Life Insurance…or term?”.
It’s quite possible. If you make more than $60,000 per year, have a mortgage, credit card debt and dependents, that $1000000 in life insurance is a must. Sure it sounds like a lot of money but when you crunch the numbers you see that cash evaporates when someone dies.
For the most part, term life insurance is sufficient.
This is because it provides temporary protection that is set up for income replacement to cover the worst case scenario. It’s incredibly affordable because there’s no guaranteed payout or cash value accumulation BUT it provides a fantastic safety net.
Gotta love it!
Permanent or whole life insurance also plays a part if you have a substantial estate to plan for. Life insurance is a great tool if you’re wealthy and I’m happy to go through all the options with you.
No matter which path you choose, always work with an independent life insurance agent like those at Policy Architects. We have access to the best life insurance companies in Canada and will find you the best coverage for the most affordable rates.