The Term Policy That Expires at the Worst Time
Dev and Anita, both 47, have two children aged 12 and 15. Dev earns $180,000; Anita earns $70,000. Their mortgage is $520,000, and they have $40,000 of credit card and car debt. Dev's 20-year term policy for $500,000 was purchased at age 30 and expires in three years. Anita has $250,000 of group life through work, convertible only on termination. Their RRSPs total $260,000, TFSAs $45,000, and RESP $30,000. Dev has type 2 diabetes, well controlled, and a body mass index of 33. They want the children through university debt-free and the surviving spouse to keep the house.
1. Calculate the coverage need on Dev's life and explain why the expiring term policy is a critical problem.
Read the worked answer
Capital needs: mortgage $520,000 + consumer debt $40,000 + education funding roughly $120,000 for two children (about $60,000 each including the RESP shortfall) + final expenses and emergency buffer $50,000 = $730,000. Offset by RRSPs $260,000 + TFSAs $45,000 + RESP $30,000 + Anita's group life $250,000 = $585,000. Net need on Dev's life is roughly $145,000 of capital, plus income replacement: Anita's $70,000 income against a $96,000+ household spend leaves a shortfall that requires perhaps $400,000-$500,000 more to sustain the family.
The critical issue is insurability, not arithmetic. Dev is 47 with diabetes and a BMI of 33; a new medically underwritten policy will be rated, possibly heavily, and the expiring policy was priced at age 30 in good health. If Dev waits until expiry at 50, the rating worsens and the conversion window may be gone. The action is to apply now, while the existing policy is still in force and before any further health change, and to check whether the current policy offers a conversion privilege to permanent coverage without evidence of insurability.
2. Anita proposes cancelling her group life to save premiums and relying on Dev's income. Evaluate.
Read the worked answer
Reject it. Anita's $70,000 income is a material part of household cash flow; if she died, Dev would face childcare, household, and possibly reduced work capacity. Group life is cheap and the conversion privilege on termination is valuable protection against future uninsurability - cancelling forfeits both.
More importantly, the household is underinsured on both lives, not overinsured on one. The correct move is to keep Anita's group coverage, add a convertible term policy on her life sized to replace her income and cover childcare, and simultaneously secure Dev's coverage before his term expires.
Also flag: the $40,000 of consumer debt should be retired from cash flow before adding premium obligations, and the couple should confirm beneficiary designations on the group plan, since group life often pays to a default beneficiary that may not match the will.