Life Insurance - Review Your Coverage

Many of us purchase life insurance between the ages of 30 and 40 and subsequently pay no further attention to our life insurance needs. Today, I have a simple objective: to encourage you to review your current coverage.

Ask yourself this question. Has there been a change in your personal circumstances since you last purchased life insurance? If the answer is yes, now is the time to ensure you have sufficient coverage.

We hate paying life insurance for two reasons:

1. It forces us to accept our mortality.

2. As we age, the cost of life insurance becomes prohibitive, so most people who are lucky enough to live a full life, let it lapse (especially in the case of term insurance) and thus, have paid substantial sums of money for no monetary return (although, I think living is probably a fairly good non-monetary return).

Luckily, most of us get over these two hurdles and purchase life insurance to cover, amongst various things, the following:

1. Income replacement – life insurance acts as a replacement of income for the deceased person. This is very important where one spouse/partner is the breadwinner. The objective here is to allow your family to live in the manner they are accustomed to.

2. Financial security for dependents – somewhat related to #1, insurance ensures your spouse/partner is taken care of the rest of their life, and your dependants are financially covered until they are ready to join the workforce.

3. Mortgage protection - insurance pays off the family’s largest debt, typically the mortgage on their home.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal, in case they were to pass away.

Your Life Insurance Coverage Check-up

You may wish to review the following items or issues, to ensure your current life insurance coverage is up-to-date:

1. Your current salary or self-employment income – review your income. Has it changed significantly since you put your initial life insurance in place? If the answer is yes, and you are like most people in that your monthly family spending has expanded in proportion to your higher income, you will need more insurance to replace that income and increased family spending.

2. Life Expectancy – life expectancy continues to increase. In Canada, the average female is expected to live to about 84 and the average male to about 80. There is approximately a 25% chance one spouse/partner will live to the age of 95. The question for you is: what assumptions did you make about life expectancy when determining your life insurance needs for you and your spouse/partner/family? You may want to revisit those assumptions.

3. Debts – review your current debt load. Has your mortgage increased or decreased? Have you tapped into your Line of Credit for home renovations or investment purposes? Have you incurred any new personal debt?

4. University – many children attend university outside of Canada because the enrollment at many Canadian professional schools is very limited. Do you think your child(ren) may need to do such? If so, those costs could be 3-5 times higher than those of a child who studies in Canada.

5. Cottage – do you plan to leave the cottage to your children? You may want to ensure you and your spouse/partner have enough insurance to cover the taxes on the last of your deaths.

6. Estate Planning – some parents wish to use their insurance to leave a legacy to their children. If that is you plan, is your current insurance sufficient? If you are one of those parents, consider converting part of your term insurance to permanent insurance, if your policy allows such, or consider purchasing some new permanent insurance. If you have a private corporation, consider a corporate funded insurance policy as discussed in this blog post.

The above discussion is fairly simplistic. As noted, the main objective of this post is to have you review your current life insurance, to ensure it is sufficient for your current needs. If you determine your insurance is insufficient, make an appointment with your insurance advisor.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

How Not To Move Back In With Your Parents - Book Review and Giveaway

Rob Carrick of the Globe and Mail is one of my favourite finance writers. Back in March, he had the audacity to release his latest book, How Not To Move Back In With Your Parents, during income tax season. As such, I wasn’t able to read the book until recently, but, as they say, better late than never. Rob has been kind enough to provide me with two copies to give away to readers (see the details at the end of this post).

The book is promoted on Rob's website as a book that speaks not only to late teens and 20/30-somethings, but also to their parents. Rob states “There’s a lot parents can do to help their kids develop good financial habits, and to strategically assist them as they graduate, move into the workforce and start a family”.

As a father of a 22 and 20 year old, I was intrigued by the book’s premise.
I just finished reading the book and quite enjoyed it. Rob is blunt (a trait I certainly admire) and I really appreciate his no-nonsense, give it to them straight-up approach in providing advice to both parents and their children. While his approach would seem to resonate with parents of my generation, Rob also seems to have a finger on the pulse of the younger generation, which is reflected in his humorous and informative case studies.

Personally, I think Rob may be slightly ambitious with his dual objective of speaking to parents and young adults. It is not that I don’t think he does an excellent job in reaching both audiences; I am just dubious that the younger audience will take heed until they have made many of the mistakes he tries to save them from. I know that when I try to give my son financial advice, it is like talking to a wall, a wall that has eyes that roll up and down and I know a little bit about finances. Hopefully, I am wrong and young people have/ will embrace this book, because it is definitely an excellent guide for them.

Chapter Outline

Below is a chapter summary. I have noted my favourite comment Rob makes in each chapter. I just find them insightful, practical and several caused me to chuckle.

Chapter 1: Affording College or University – “Unless your parents are okay with you being loaded down like a mule with student debt, they should be paying as much attention to RESPs as to TFSAs and RRSPs”.

Chapter 2: How to Handle Debt, Both in School and Afterward – “Shrewd handling of credit is one of the things that defines a financially successful person”.

Chapter 3: You and Your Bank – “Banks are basically stores that offer financial products for sale. They are in business to sell you stuff, not to be your adviser, your partner or your friend”.

Chapter 4: Saving, Budgeting and What to Do if You Have to Move Back Home – “A little parental support at a key moment can help position you for a lifetime of success”.

Chapter 5: Looking to the Future: RRSPs and TFSAs – “A moderate, steady approach to retirement saving is the best present you can give your future self”.

Chapter 6: Mobility: Or, Cars and You – “Stay car-free as long as possible after you graduate”.

Chapter 7: Buying a Home – “Renting can be the shrewder move than buying if you cannot properly afford the full cost of buying and owning a home”.

Chapter 8: Weddings and Kids – “Arrange the best wedding you can afford”. Also, I could not resist this nugget on engagement rings that probably alienated half the females reading the book: “Men, don’t buy that crap about spending 3 months’ salary – spend what you can afford and remember that you can always buy a nicer ring later on as an anniversary present”.

Chapter 9: Insurance and Wills – “Young adults starting a family have a lot of expenses and term life is the most economical way to provide for a family in case of disaster”.

I am going to give away one free copy of Rob’s book to both a young adult and a parent. To enter the book giveaway, in the comment section below, please provide your first name and the first initial of your last name and identify yourself as a parent or young adult. Then, either provide a comment on the blog post, or give me your best financial tip for a young adult from a parents perspective; or if you are a young adult, the best tip you would give to another young adult. For my more social savvy readers, you can tweet your comments to me, including the hashtag #BluntBC. I will announce the two winners next Wednesday on my blog and twitter account.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Private Corporations - Using a Family Trust to Fund University Costs

I have discussed the use of a family trust in two prior blogs – Introducing a Family Trust as a Shareholder in a Private Corporation and Should Your Corporation’s Shareholder be a Holding Company or a Family Trust?

Today, I have a back to school blog post on using family trusts to fund your child's University education where one of the shareholders of your private corporation is already a family trust or you plan to introduce a family trust as a shareholder.

I know that many readers of this blog do not have private corporations. I apologize in advance for the restricted nature of this blog post. But, this is a case where those who operate through a corporate entity have a significant income tax planning advantage. As I noted in this blog post, personal income tax planning is a fallacy for most Canadians.


I don’t have to tell anyone that raising children is expensive. One of the largest expenses is education. For purposes of this blog post, I will ignore whether you feel as a parent your child should pay for some or all of their post-secondary education and assume you intend to pay for as much of that education as possible.

Most parents at a minimum utilize a Registered Education Savings Plan (“RESP”) to help fund their children’s educations. RESPs are excellent educational funding vehicles. The government provides grants, investment returns grow tax-free and the investment income is taxed in your child’s hands, when they eventually use the funds for post-secondary education purposes (typically resulting in minimal income tax).

However, in many cases, parents do not have the funds available to contribute to an RESP on a yearly basis, or, where they have large families or children pursue lengthy and/or multiple degrees, an RESP may be inadequate to fund all their children’s educational needs. A family trust can be utilized to either fully fund your children's education or to fill the "funding gap".

Family trusts are typically either introduced upon incorporation, where the family trust subscribes for the initial common shares issued by the corporation, or at a later date (usually as part of an estate freeze) where a family trust subscribes for new common shares in the corporation after the estate freeze or reorganization.

I discuss the concept of an estate freeze in the Introducing a Family Trust as a Shareholder in a Private Corporation blog I note above. But quickly, the intent of an estate freeze is to lock in the current fair market value of the shares held by the current owner(s), typically the parents into new special shares. As the special shares have a set fair market value, the parent's future income tax liability is fixed based on the frozen value and any future growth of the corporation accrues for the benefit of the new common shares issued to a family trust or any new shareholder.

Whether a family trust acquired shares in the private corporation upon incorporation or upon an estate freeze is irrelevant; what is important is that once the family trust is in place and the corporation pays a dividend, the family trust can allocate the dividend it receives from the company to any beneficiary of the family trust that is 18 years of age or older (as a side note, when a beneficiary is allocated a dividend from the family trust when he or she is younger than 18 years, a punitive tax referred to as the “Kiddie Tax” eliminates much of the benefit of allocating dividends to these beneficiaries).

Assuming any part-time employment income the beneficiary child has earned during the summer or working part-time while at school is offset by the education tax credit he or she is entitled to as a result of the payment of tuition fees, a child 18 years or older can receive approximately $39,400 (in Ontario) in dividends from a private company tax-free. For example, if a family trust received dividends from the family business and allocates $39,400 to a child who is at least 18 years of age to pay for their University costs (tuition, books, rent, food, etc.) this could save the parent upwards of $12,000 in income tax. Alternatively, if a family trust allocated the $39,400 as two separate $19,700  dividends to two children over 18, no income tax would typically be payable. If a family trust receives $78,800 in dividends from the family corporation and allocates these dividends as $38,100 to two children, the parent could save as much as $26,000 in taxes.

It should be noted that there may be some tuition credits wasted under this plan when a dividend is paid (under the Income Tax Act, the tuition credits must be applied against taxable income until taxable income is nil, even if the credits are not required to reduce income tax to nil). If no dividend was paid, the child could potentially carryforward and/or transfer some of the credit to their parents. However, typically the forgone tax savings is minimal, but this issue must be considered.

Finally, parents must recognize that any money paid as dividends to your children, is legally their money. Thus, ideally, the money should be used to pay for University or College, to pay rent, to pay for a car, or any other expenses for the child. Any excess funds should be set aside for the child, maybe to help with a future house purchase.

There are many benefits of a family trust including the potential multiplication of the $750,000 capital gains exemption; however the funding of your children’s education is often the most practical and tax efficient.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.