As licensed insurance advisors, how do we know when we’re fulfilling our clients’ needs for the proper amounts of insurance and providing the right products for their situations?

It starts with due diligence, which must be performed when advising clients about insurance.

First and foremost is to determine the proper amount of coverage. Typically, a couple with children and a mortgage are saving for education and retirement. So you need to insure the income that would be lost in the event of death and cover their debts so the family can retain its standard of living.

When conducting a fact-find with clients, ask the right questions to determine their needs. The questions typically include:

What’s your annual income (for both spouses if applicable)?

  • Our ability to earn income is our most valuable asset. Without income, there would be no home, car, or investments.

    Do you own your own home and do you have a mortgage? If so, what’s the amount left owing on your mortgage?

  • If they have their mortgage insurance with a financial institution, make it clear it’s much better to cover their mortgage with personal insurance.

    Do you have any other debts?

    How old are your children?

  • If both spouses are working outside of the home, typically the income replacement period will be until the youngest child is done post secondary education.

    Do you have group life insurance through your employer?

    Do you have any other personal life insurance?

    When performing a fact-find, I don’t include any investment value to reduce the required amount of insurance. These investments usually have a specific purpose – RRSPs are for retirement, not death, and there are tax consequences of using RRSPs to pay for expenses upon death. Life insurance is the best and most economical way to cover this catastrophic event.

    There are many different needs-analysis calculators, but to keep it simple, you will typically replace about 70% of gross income. Use a conservative rate of return, say 5% and keep it indexed to inflation, about 2.50%, for a period ending when the youngest child is done post secondary school. This is typically about 20 years.

    This number, by rule of thumb, is about 11 times the client’s annual gross income. For a person making $100,000 per year, it takes $1,124,322.73 to replace the needed income back into the household. If they have a mortgage of $250,000, the person’s total need would be just under $1.4 million of coverage.

    Case Study

    I’ve found, over the years, that most clients will need a 20-year term insurance in order to keep the costs down and to have the requisite sum required. Let’s assume both spouses are aged 33 and nonsmokers, earn $100,000 each per year, have two times their annual income with their group benefit plan, and have two children ages three and five.

    A quick market survey of the Canadian life insurance companies shows $1.2 million of 20-year term for each would cost about $154 to $165 per month at standard health rates – less if they qualify for a preferred rate. This coverage will provide them with the total amount they’d need in the event of either death.

    Both members of the couple have a defined contribution pension plan through their employers and both contribute to their RRSPs. They have already accelerated their mortgage payments and expect the house to be paid off in about 15 years. Even though this couple is in their early 30s, they have a significant sum up in their RRSPs and pensions, in addition to other assets they may accumulate along the way.

    We all work with clients who are near retirement or well into it. And we almost always have discussions with them about estate planning and the role life insurance plays – especially a joint last-to-die policy. For this couple, (let’s call them Terry and Jane) it’s not too soon to have this conversation. They will at some point need to look at their assets, the affects of taxation, and how life insurance can be of value both in their estate and in retirement.

    They’re young, healthy, and more likely to qualify for insurance now. If they start the plan today, they’ll have a significant amount built up in permanent insurance as well as a substantial cash value in the policy, which can be used to supplement retirement income through a collateral assignment strategy.

    We’ll assume Terry and Jane have a balanced equity portfolio with their RRSPs, pensions, and so forth. Like a lot of younger people, they’re likely more weighted in equities than fixed income. In this instance, I’ll often recommend a traditional whole life plan that will build an ever-increasing death benefit in addition to substantial cash values. The cash values that build in the traditional whole life plans provide a smooth return and are not affected the same way an equity portfolio is when markets are volatile. In addition, no investment decisions are needed in these types of policies, by you or your client.

    For my own use, I’ve held whole life policies since the early 1990s and the values in my policies are within 7% of the original projected amount and continue to provide a very smooth and steady return. I consider the values I build in these policies as the fixed income portion of my portfolio. These funds grow free from tax and upon death the entire death benefit is tax free. With the collateral assignment strategy, further tax-free income is achieved.

    In Terry and Jane’s situation, they decided to commit to a deposit of $10,000 per year into a joint and last-to-die insurance plan and are committed to making deposits until they turn 60. A whole life joint last-to-die plan with an initial death benefit of $500,000 is established. Whole Life plans today allow additional deposits similar to universal life, which will purchase paid-up additions for an increased death benefit as well as tax sheltering these funds.

    The projected death benefit of this plan exceeds $2.3 million in 30 years and a projected total cash value over $617,000. For a fixed income investment to achieve this cash value, it would need to achieve a 9.63% rate of return for 27 years.

    If Terry and Jane wait until age 70 to implement this strategy, and want income for a 15-year period, it’s projected their tax-free income would be $81,521. And their projected estate value after the income stops exceeds $2.7 million. If we invested $10,000 per year at 5% in a fixed income portfolio and started taking the same income for the same period of time, their capital would run out in just over seven years (see, “Client Age and Estate Value,” this page).

    This type of planning may obviously not fit every situation, but for clients you deem financially successful, it can be an incredibly valuable and integral tool in their overall financial plan. I would encourage you to look deeper into your client base as you likely have many clients who fit this profile.


  • John Jordan, CFP, an insurance and estate planning specialist with Dundee Wealth Management in New Hamburg, Ont.


    Originally published in Advisor's Edge