A new survey by PolicyMe, digital life insurance platform, found that 77 per cent of Canadian parents with dependent children have life insurance. While this is promising news, the unfortunate reality is that many parents are still making four common mistakes when it comes to their life insurance coverage.
According to the findings, only 33 per cent of parents with children under the age of 18 have term life insurance, a product designed to meet the needs of the vast majority of parents with dependents, compared to the 70 per cent of Canadians parents with life insurance as a benefit through their employer. Of those parents with life insurance as a work benefit, 44 per cent rely on it solely, which is typically insufficient to protect their family. The reality that many parents have costly life insurance products, rather than the more affordable term life insurance, helps to explain why half of parents (50%) who don’t have life insurance say they haven’t bought it because it is too expensive.
“Most parents should have life insurance to protect the financial future of their family, but we need to educate more parents about the best way to protect their family. Too often we see the same mistakes happening over and over again due to poor financial advice,” says Andrew Ostro, Co-founder and CEO, PolicyMe. “Parents have a lot of expenses, and most don’t have a lot of extra money at the end of the day. There’s simply no reason parents should have to spend more than what is necessary to protect their loved ones.”
Four common mistakes parents make when it comes to life insurance
- Mortgage Life Insurance: A quarter of Canadian parents (25%) with children under the age of 18 have mortgage life insurance. This product is protection for creditors, not parents. It pays off the remaining balance of a mortgage if the mortgage holder passes away. Mortgage life insurance is more expensive than term life insurance, and creditors receive the payout, not the family. Additionally, if mortgage providers are switched, the mortgage life insurance doesn’t automatically move with you.
- Permanent Life Insurance (including “universal” or “whole life”): 22 per cent of parents with children under the age of 18 have purchased the expensive, complicated, and often unnecessary permanent life insurance product. Permanent life insurance is typically a whopping 5-15x the cost of term life insurance, and if you don’t expect to have dependents (i.e. young kids or aging parents) or debt (i.e. a mortgage) well into the future, why pay insurance premiums for the rest of your life? Permanent life insurance is a product that should really only be considered by high-net-worth individuals and possibly by older Canadians (55+).
- Life Insurance for Children: 23 per cent of parents purchased their children their own life insurance policy, which is yet another unnecessary product. Often, parents buy these policies as a way to put money aside for their children. However, there are much better ways to save for a child’s financial future or to prepare for unexpected funeral costs. Instead of parents locking into a permanent plan with high monthly premiums — that they’re unlikely to ever make a claim against — it makes better financial sense to put that money into a savings account for a child’s future.
- Group Life Insurance: 70 per cent of parents with children under the age of 18 have group life insurance, or life insurance as a work benefit through their employer. Life insurance is a great employee benefit to have, however, it is often not sufficient on its own and should be viewed as complementary to a more robust term life insurance policy. Because group life insurance typically covers one to two times an individual’s annual salary, it doesn’t offer enough income protection for most families to cover ongoing expenses once future earnings are suddenly taken away.