Most Canadians don't have enough life insurance

When I was four years old, my grandfather gifted me something that no four-year-old is capable of appreciating.

He purchased me a permanent life insurance policy.

That decision has left me incredibly fortunate. Over the years, annual dividends were used to purchase additional coverage and the policy has grown into a healthy amount of money with a cash value. But I’ve grown, too — from an unknowing four-year-old without an income, debt, or shared expenses into a 29-year-old with all of the above.

If I were to die tomorrow, there’d be funeral expenses to cover. There’d be my half of a car loan. There’d be my student loan, my line of credit, and my credit card all to pay off. There’d be my $700 a month in rent that my partner would lose. The list goes on. It’s worth asking myself, then: will my current policy — one that I’ve largely ignored for the last 25 years — leave my loved ones with enough money after I die?

Last year, 22 million Canadians, or 60% of the population, owned $4.7 trillion in life insurance coverage, according to the Canadian Health and Life Insurance Association. That number includes both group life insurance offered by employers as well as individual policies. That works out to an average of $417,000 per household — or about five times the average household income. While it sounds like a lot of money, some experts believe that Canadians are actually underinsured.

I have never ran into a good life insurance group plan. They all need to be topped up

A 2017 Edward Jones study revealed that only 16% of Canadians had purchased a life insurance policy that could cover their remaining mortgage payments in the event of death. It also found that a quarter of Canadians have personal (not provided via an employer’s group plan) term life insurance, and 18% have personal permanent life insurance. (Permanent life insurance provides lifelong coverage, usually accompanied by a cash value that can be borrowed against the policy. Term insurance, on the other hand, provides coverage only for a set amount of years.)

As I’ve learned, there’s a good chance a personal life insurance policy will need to be adjusted over time as people’s lives and expenses change. The Edward Jones study found that only 26% of Canadians thoroughly reviewed their insurance needs within the past year, which it chalked up to a lack of understanding of insurance needs. That’s a sound explanation, but it’s only part of the puzzle. Industry experts have a few other theories about why Canadians are coming up short in the life insurance department.

1. We tend to rely on group plans

If you’re fortunate enough to have benefits through your employer, then you probably have some amount of life insurance. This is what most people rely on for coverage. But over the decades, in an effort to offset rising premiums, companies have downgraded their offerings.

“It was fairly typical 10 or 20 years ago for group plans to provide 1 or 2 x base salary within a group plan,” says Rona Birenbaum, a fee-only financial planner in Toronto. “These days, I’m seeing more and more plans as simply having a flat $25,000 worth of coverage.” One or two times base salary is generally not even enough money to pay off a mortgage.

David Mendenhall, a life insurance broker with SurexDirect says group plans are great for disability, health and dental coverage, and sometimes critical illness. “But they’re almost always lacking in the life insurance department,” he says. “I have never ran into a good life insurance group plan. They all need to be topped up.”

Employees can purchase an individual policy outside of their group plan. But there’s a limit to the amount of life insurance someone can own. “There has to be what’s called an ‘insurable interest,’” explains Birenbaum. “A risk that needs to be covered. If somebody has a $100,000 net worth and a $50,000 annual salary and they’re asking for $5 million worth of coverage, it doesn’t make sense given their circumstance.”

Even among households with $100,000 or more of annual income, one third of them believe that they are inadequately insured

Group life insurance plans are cost-effective in the short-term, but with the rise of the gig economy, rife with self-employment and contract work, many Canadians are without access to one. Earnings from precarious employment don’t exactly make an individual policy affordable, either. A 2017 workplace review by the Ontario Ministry of Labour found that only 18% of workers in non-standard employment relationships have personal life or disability insurance.

According to a 2013 Household Trends report on Life Insurance Ownership from LIMRA, a global research firm for more than 850 financial services firms around the world, the proportion of households with only group life insurance has increased over the years: 37% in 2013, up from 31% in 2006, and 28% in 1999. (LIMRA’s report is done every six years, and an updated version will be released in the second half of this year.)

“Relying only on their group coverage leaves many households with only minimal life insurance protection,” Louis Sklenarik, public relations and social media for LIMRA, told LowestRates.ca in an email. “At an average of $179,800.”  

Plus, says Birenbaum, “You don’t own the policy. So if you leave the employment, either voluntarily or involuntarily, you can’t take that coverage with you.”
 

2. We just don’t do the math

Life insurance pays out after you die. This much we’re clear on. But knowing how much life insurance we actually need — or, in other words, the expenses life insurance should be able to cover — is where things get a little murky.

Most of us underestimate the importance of our income over the long term. We generally think of life insurance as something that should be able to pay off all our debts, including our mortgage. To cover those expenses is absolutely crucial, but we tend to leave it at that.

“That’s only half the picture,” says Birenbaum. “Once the debt is gone, then what?”

An adequate amount of life insurance should be enough to: cover funeral expenses; pay off all your debts, including your mortgage; replace your income (ideally through to the planned retirement age) for spouse and any children you leave behind; and, if there are children in the picture, be enough to allocate for their education.

Of course, the magic number is going to differ for everybody. But if life insurance should be able to cover all of those expenses, then we’re not talking about a small sum of money whatsoever. Which brings us to reason number three.

3. We think life insurance is too expensive

We might recognize its importance, but that doesn’t mean we believe life insurance is affordable, or even worthwhile. “People would much rather spend $1,000, $2,000, or $3,000 a year on a vacation than on life insurance,” says Birenbaum.

“No one thinks life insurance is important until they have a mortgage and dependents,” adds Mendenhall.

Yes, monthly life insurance premiums are yet another fixed expense to add to the pile, but in the world of life insurance, how “insurable” you are depends a lot on your age and your health. Generally speaking, the older you are, or the more health problems you have, the higher your premiums will be.

Life insurance might not seem like a good use of your money in the short-term, but that’s actually when it can benefit you the most. If you buy a policy before the mortgage and dependents come along — when you’re young and healthy and the premiums are relatively affordable — you’ll be saving yourself a lot of money in the long run should you decide at 45, let’s say, to purchase life insurance. In other words, you might think life insurance is too expensive now, but it will likely only get more expensive (and complicated to be approved for) the longer you wait to buy it.

4. We don’t trust the insurance industry

Being encouraged to buy life insurance by a broker or insurance company is like being told by a chef that his restaurant is the best in the city. It doesn’t quite feel like objective advice. The same holds true for the insurance industry. “There’s a credibility gap,” says Birenbaum. “Insurance agents probably don’t rank too high up in the trust category.”

She’s right. According to the 2018 CanTrust Index conducted by Proof Inc. — an organization that measures Canadians’ level of trust in a range of leaders, organizations, and information sources — only 30% of Canadians said they trust life and health insurers to do what’s right for Canadians and society.

Mendenhall thinks this has a lot to do with education. “They don't trust because they don't know,” he says. “We’re influenced by the American market and media and we only tend to hear the negative stories. When people are educated and understand products, companies and markets, they have no problem trusting the industry.”

Fair enough. But it’s also important to be mindful of the fact that the life insurance industry, which was worth $23 billion in 2016, is a business with its own bottom line to meet. In 2013, life insurance ownership in Canada was at a 30-year low. That year, “Ownership of individual life and group life insurance declined among all markets,” says Sklenarik. “Low-, middle-, and high-income households.” In fact, almost three in 10 households carried no life insurance on anyone in the home.

While it’s true that the industry is largely the one telling you to buy, concerns about adequate coverage are also coming from Canadians themselves.

LIMRA’s 2013 report surveyed 3,244 Canadian households with 8,106 household members. The person most involved in making decisions about finances, investments, and life insurance was asked to complete a questionnaire. The results revealed that 45% of Canadian households don’t believe they have enough coverage.

“Even among households with $100,000 or more of annual income,” says Sklenarik, “one third of them believe that they are inadequately insured.”

Life insurance is one of those products where you don’t want to find out you had the wrong coverage when your loved ones actually need to use it. It’s also one of the cheapest forms of insurance to get.

“The reason why it’s generally inexpensive as opposed to other types of insurance is because the probability of the event is very low,” says Birenbaum. “So if it’s a low probability of someone dying in the next 10 or 15 years, then the cost to cover that very low risk will also be very low. The younger you are and the healthier you are, the lower the cost, and I think it would surprise many young couples or individuals with kids actually how inexpensive it is.”