If I were to pass away I don’t want my family to be put in a situation where they have to sell everything and lower their standard of living because i’m gone. If they decide they want to move or sell some of the assets then that is fine but they shouldn’t have to.

[...] Insurance Ratio – As another pillar of personal finance, term life insurance is a must. The author explains how much life insurance you need at each age group.  To me, [...]

[...] Insurance Ratio – As another pillar of personal finance, term life insurance is a must. The author explains how much life insurance you need at each age group.  To me, [...]

What do you want for your family in terms of income replacement?
What do you want for your family after suffering the loss of a parent?
What do you want to leave as a legacy for your children?
Etc. etc.

The only relevant question to answer is if you knew you were going to die tomorrow…how much would you buy?

[...] Have enough term life insurance. [...]

By answering some questions about your particular financial situation, you get a much more accurate estimate, rather than by using the old 7-10 times your annual income approach life insurance agents used to use.

[...] the new home, we're going with term life insurance instead of typical mortgage life insurance.  Why? The reason being is that mortgage life [...]

I don’t know the exact details but the bottom line is that while the scenario Evan describes doesn’t make a lot of sense in Canada, it does make sense in the US.

Mike

Yeah, we probably are a little off target for the topic. Just a couple points.

There are some people who will never spend all their money and most often those people have incorporated businesses. This is probably why Evan mentioned the business.

If they don’t care about how much money they leave to the next generation then sure they don’t need insurance. What I find though, just like insurance needs change over time, people’s attitudes change. As people get older they think more about wanting to leave money to their children or grand children. True not everyone.

So back to how much insurance do you need. Unless you are going to be very succesful and not spend all your money stick with term and invest the difference. You can always use your home as an insurance policy – it pays out tax free – although you may take the tax free income from the house and spend that too.

As a side, there is no diffence between corporate and personal life insurance, just the way it is used. Plus it is cheaper to pay for it with corporate dollars.

Check the Universal Life links to get more details of how this works in Canada. I asked a lot of questions and Ed had a lot of answers, but long story short, when the last person dies and the wealth moves down it all get “cashed out” and any unpaid taxes are due.

The “family cottage” will incur capital gains taxes, and investments will be converted to cash and losses/gains claimed on taxes. These are all taxes you owed anyways but that were deferred in some way, not some new set of “estate taxes”.

So, to whit:
You cause a fire sale of assets that may or may not be worth that amount upon death, i.e. the New York Housing market just took a major hit….if you were to sell your “1,000,000? house it may only go for 800K (housing is down 20% on long island)

This would be great in Canada, the capital gains would be way lower and the kids would still have the place. (assuming they could cover for the tax)

Evan brings up two other points:
FT it is not always simple to sell the assets. Plus business owners spend their life creating something and there is often an emotional attachment to the business – They don’t want to lose it to taxes and they want their kids to take it over.

You’re not required to sell the assets, you’re just “cashing out”. If you have a home “valued at” 500k when you die, the kids pay your capital gains tax on the difference between the new price and the original and the house is theirs. But you should be able to cover the taxes on an unwanted item by selling that item. If you can’t sell the item then it has no value and can’t incur capital gains taxes.

As to business owners, that’s a completely different line. Personal life insurance has no relation to Corporate insurance, as nobleea mentions, that’s succession planning and has a scope way wider than some simple “what am insured for”. If people don’t want their businesses taxed to death, they’ve already incorporated and written the legal documents to ensure that succession is handled.

Really though Evan, what I don’t get is why you’re dying with 4 million dollars in the bank and kids not already taken care of? Is that money fully invested just ready to eaten by the income tax crows? If you have kids that need the money that stuff should already be hidden in trust funds or invested in corporations owned by the offspring or basically off the books. Bill and Melinda Gates aren’t going to pay $80 billion in estate taxes if they died tomorrow, so maybe some minding of business is in order here.

If you have 4 million and kids and you’re under 30 then maybe none of my ideas are valid. But if you have 4 mil, fully grown kids and you’re over 70 (or some reasonable dying age) then what the heck are you doing with 4 million in assets? By now everything relevant should be in the kids’ names (probably including your home) and you should be living off an annuity.

I mean maybe you’re somewhere in between (you 55 kids are 30, lots of investments), but if the 1.5 million is even relevant to the next generation, then you’re probably doing something wrong. Like what is that $1M on a home and $3M in stocks and bonds? If you want your kids to have money, why not just say: “Hey Son we’re buying a 500k business jointly and I’m spotting you the money. We’ll draft up the whole thing so that when I die, you get my shares at a deep discount.”

I think your point reinforces the need to revisit your insurance needs every once in a while – in five years the rrsp might be twice as much as it is now, or it might be less than it is now. Our expenses might have changed – many many things can change over time.

My method is more of a rough approximation – in actual fact I used a more complicated procedure but then realized that because of all the future uncertainties – a simpler, more rough estimate is probably just as accurate (if that makes sense).

Mike

You included your RRSP’s as part of the income producing base for your wife in the example. Some people may not realise that this will be taxed differently when you withdraw the dividend income from it as opposed to the non-registered assets. It won’t have the same, typically very favourable, treatment that dividends paid out from a portfolio outside an RRSP will.

But, you should be able to figure out how much money you need for taxes. If you’re passing on the family cottage and want it to stay in the family, then sure, plan for the extra tax amount. But if it’s just money in registered and non-registered accounts, who cares? So they only get 60% of the full amount. That should be more than they were expecting (I would never ‘expect’ an inheritance, nor would I want my children to).

As for a business, if you want it to stay in the family, that should be part of succession planning, which is far more complicated than just saving some more money.

My approach to life insurance planning is the same as for retirement planning. You need to determine the financial goal – ie what kind of lifestyle does the survivor want to have? Then you need to figure out what the annual income is necessary to provide that lifestyle. I like using the 4% rule to determine how much of a nest egg is required to provide $x of income.

In our case we’ve determined that we want enough money if I die so that my wife can get by reasonably well without working. Our current expenses not counting mortgage is about $32k (which will probably go down if I’m not around). Assuming she will need $33k of gross income (mostly cdn div income) (according to taxtips.ca) then she needs a starting portfolio of about $800k. With a current mortgage of $180k and rrsp of $230k, that means we need $760k of insurance to meet this requirement. ( $760k – $180k + $230k ) * 0.04 = $33k.

The problem of course is that these factors keep changing which is why some of our insurance is only for 10 years and in five years I’ll look at cutting some of the other insurance depending on our situation at that time.

Mike

FT it is not always simple to sell the assets. Plus business owners spend their life creating something and there is often an emotional attachment to the business – They don’t want to lose it to taxes and they want their kids to take it over.

For the situation described I would look at a solution built arond the 10/8 concept with yearly renwable term. With 10/8 you purchase a UL policy and you are guarenteed to make 8% in the policy if used as collateral for a loan. You borrow at a rate of 10% (no choice – that is how they give you the 8%) which is tax deductible because you invest back into the business or an investment account. You can also use the concept to get money out of the corporation while living.

This is not for most people. Most policies have a minimum premium of $25,000/yr for 4 years or an annual income of $250,000.

Youa re 100% correct that is exactly what the kids can do, but why do it!

You cause a fire sale of assets that may or may not be worth that amount upon death, i.e. the New York Housing market just took a major hit….if you were to sell your “1,000,000″ house it may only go for 800K (housing is down 20% on long island)

MUCH More importantly, you just handed over 1.5 million dollars to the UNITED STATES Gov’t (you are right i should have specified those tax numbers) when you could have spent a little extra cash on a UL Second to die policy versus term – and saved 1.5 million

I am more than willing to admit that there is a cross over point, such that, the increase premium invested with a return of X will outweigh the 1.5 liquidity, but more info would be needed.

I know nothing about Canada estate law (didn’t teach it in law school obviously) but I am sure there is the same basic argument there!

In your scenario, the kids can simply liquify the assets and pay the tax bill. By that point, the kids should be self sufficient anyway.

I am new to your blog but not new to this field (I am the Director of Financial Planning at a wealth managment firm) I have no idea about your (or anyone else’s!) personal situation, however, if you are making good money, have kids, have a business, decent retirement etc etc YOU NEED INSURANCE (Whole life or universal life) to offset the tax due and owing at the time of death.

This statement may seem oversimplified but it isn’t for instance:

You and Wife have an estate of $4million – you die leave everything to her ZERO TAX wonderful! but when she dies and leaves it all to the kids in 2012 – you get a million dollar exemption then owe approximately 47% on that remaining 3mil e.g. 1.5 Million LIQUID tax bill, how do you solve for that?

YUP – UL or WL

JUST A THOUGHT!

Insurance is a personal thing. How do you want things to be for your spouse and children if you are not around? How much money will that take?

I have delived cheques to a surviving spouse and in most cases there is not enough money. A lump sum can seem like a lot of money but it can go fast.

I agree, just buy term, it is inexpensive and you can get a lot of it. Most people that buy just Whole life or UL don’t have enough coverage because the premium is too high. Consider the whole life or UL when you are financially set.

Remember that term insurance is sold in bands and the unit price reduces at 100,000 $250,000 and $500,000. So if you are thinking of getting $200 or $225,000 take a look at the $250,000 premium.

Also, if “you” are not sure how much insurance you need, error on the high side. If you are doing the other financial planning strategies discussed on this site then an extra 5 or $10 a month on life insurance should not be a big deal.

Ok, let me have it George, as part of my pratice I do offer life insurance.