Canadian families may be underinsured !

April 25, 2014 at 10:44 am Leave a comment

B561DFD6C1853D371CCFDB71649E2FWhen parents are simply trying to make ends meet, the last thing they think about is the future. That’s why life insurance often takes a back seat to mortgage costs, car and house repairs, school fees, and all the other everyday costs of running a family.

In fact, life insurance has slipped from an important ‘must-have’ a generation ago to simply another expense for modern day families to juggle — or ignore altogether.

Both men and women are less likely to own life insurance than they were 10 years ago, according to research from LIMRA, an insurance industry trade association. But the declines are much larger for men.

So much so that men are now approaching the traditionally lower ownership rates of women. Thirty nine per cent of men and 43 per cent of women actually have no individual life insurance, preferring instead to rely on coverage provided by their group plans at work.

Worse yet, overall life insurance ownership has sunk to its lowest point in 30 years. Only 68 per cent of Canadian households have some kind of life insurance, compared with 79 per cent in 2006, LIMRA reports.

The result is that married households with children under age 18 tend to be underinsured: three in four Canadians admit they’d have difficulty meeting living expenses if a primary wage earner were to die.

But they don’t do much to solve that dilemma. For instance, even though one-third of new parents agree they lack sufficient coverage, six in 10 of them didn’t shop for or buy life insurance within two years of their child’s birth.

That’s striking, since conventional wisdom has been that certain life events — getting married, divorced or having a baby — were primary triggers for consumers to start looking more closely at insurance.

However, these milestones no longer seem to be prompting Canadians to seek the coverage they might need to protect their families.

“When we asked what keeps consumers from buying life insurance, the top two reasons given were: low priority and a perception that it’s not affordable,” says Cheryl Retzloff, senior research director for LIMRA.

But how much insurance you need and what type to buy is really not that hard to figure out, maintains Russ Smart, president of IDC Insurance Direct. Nor does it have to be inordinately expensive.

As a quick benchmark, he suggests, you should at least make sure you cover the mortgage and receive ten times your salary.

“You want to cover your mortgage until it’s paid and provide insurance as long as you have dependent children, as well as something for your spouse if you pass early,” Smart notes.

That could be a 15 to 20 year period, of course, and a bit too far away for many busy families. But it’s important to look at things from a long-term perspective, Smart maintains.

“If money is really tight, purchasing a 10-year term policy is tempting. But remember, you’re wagering that you’ll still be healthy enough in 10 years to purchase a new policy.”

You might actually be better off considering two policies, he suggests. Secure a policy for your mortgage that has a term equal to the mortgage and a 10-year term policy equal to 10 times your salary.

That way, if you have a medical issue, you’ll still have your mortgage covered and, in 10 years, some of the principal will be paid off to provide something extra for your family.

Smart offers the following example of a 35-year-old couple in good health with a $300,000 mortgage. The husband makes $60,000 a year and his partner earns $40,000.

The cost for $300,000 each with a 20-year term — plus $600,000 for a 10-year term for him and $400,000 for a 10-year term for her — would only be about $88 per month, according to recent estimates.

In other words, since the couple’s combined income is $100,000, they’d be able to cover their family for about one per cent of their collective income, he maintains.


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