The Commissioned Earner and the Coverage Gap
Mr. and Mrs. Lam are 39 and 37, with two children aged 6 and 3. Mr. Lam earns $150,000, of which $45,000 is commission; Mrs. Lam is self-employed and nets $60,000. Their mortgage is $640,000 with 24 years remaining, and they have $85,000 in TFSAs, $120,000 in RRSPs, and $20,000 in a chequing account. Group disability replaces 60% of base salary only, with a 120-day waiting period; there is no individual disability coverage. Mrs. Lam has no disability coverage. They want to buy a $1 million 20-year term life policy on Mr. Lam and start RESPs for both children. A colleague has proposed using a segregated fund with a 5.5% front-end load for the RESPs and deferring individual disability insurance because the group plan is enough. The mortgage renewal is in four months.
1. Identify the most significant protection gap and recommend how to address it before adding to savings.
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The largest gap is disability coverage on Mr. Lam's commission income, combined with the total absence of coverage for Mrs. Lam. Group plans usually replace a percentage of base salary only. If 60% of $105,000 base is covered, the $45,000 commission, which is 30% of his pay, is uninsured, and the 120-day waiting period means four months with little or no disability income. With a $640,000 mortgage and two young children, that gap is material.
The couple should first build an emergency reserve of three to six months of fixed costs, then apply for individual disability insurance for both spouses. The policies should use an own-occupation definition where available, a benefit period to at least age 65, and a waiting period coordinated with the emergency fund and the group plan. Coverage should be sized to replace a realistic share of after-tax income, not just the mortgage payment. Mortgage disability insurance is usually narrower and may not cover commission income. The recommendation should be documented with a needs analysis, and the advisor should not defer individual coverage merely because a group plan exists.
2. Assess the segregated fund recommendation for the RESPs.
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A 5.5% front-end load on RESP contributions is hard to justify. The first $2,500 contributed per child per year attracts a 20% Canada Education Savings Grant, so a $5,000 family contribution could receive $1,000 in grants; a 5.5% load takes $275 off the top before any growth. Over a 12 to 15 year horizon, a low-cost balanced or index portfolio inside a family RESP is likely to produce a better net outcome. The seg fund's insurance guarantees are of limited value for a goal with a known timeline and no estate-liquidity need.
The load also creates a compensation conflict that must be disclosed. The advisor should compare net-of-fee projections, explain the grant and withdrawal rules, and recommend a product that fits the objective. If a seg fund is still considered, the advisor should show why its guarantees are worth the cost. The advisor should also confirm the RESP is set up as a family plan if that maximizes grants and flexibility, and should avoid a recommendation driven by the colleague's compensation.
3. What should be verified about the group plan before finalizing advice?
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Before relying on the group plan, the advisor should obtain the booklet and confirm the definition of disability (any occupation versus own occupation), whether the 60% applies to base salary only, how benefits integrate with CPP and other income, the 120-day waiting period, the maximum monthly benefit and any cap, whether commissions or bonuses are included, portability if Mr. Lam changes jobs, and conversion privileges. The advisor should also confirm Mrs. Lam's coverage through her own business.
These facts determine the size and design of the individual policies and prevent over- or under-insurance. The review should be documented and revisited at the mortgage renewal in four months, when the couple will have to confirm affordability. The advisor should be clear that group coverage is a benefit of employment, not a permanent solution, and that a change of job could leave the family exposed.