The Parent’s Guide to Life Insurance

Welcome to the Where Parents Talk podcast. We help grow better parents through science, evidence, and the lived experience of other parents.

Learn how to better navigate the mental and physical health of your tween teen or young adult through proven expert advice. Here's your host, Lianne Castelino.

Welcome to Where Parents Talk. My name is Lianne Castelino.

Our guest today is the co founder and chief operating officer of Policy Me, one of Canada's fastest growing digital life insurance companies. Laura McKay is trained as an actuary and has previously advised Fortune 500 companies.

She's also a mother of two and she joins us today from Mississauga, Ontario. Thank you so much for taking the time.

Hi.

Yeah, thanks for having me. I'm excited.

Well, and we're going to be talking about a conversation that confounds a lot of people can be confusing and daunting, especially if you're a parent. And that is life insurance. So in the simplest terms, what is life insurance?

Yeah. So just to get really simple, life insurance is essentially a promise.

It's a promise that if you pass away your loved ones, you, your partner, your children will get a lump sum of cash that's tax free that will go towards paying for their lifestyle, whether it be just like their mortgage, their food, their daycare, the, the, all the bills that we pay every day that we rely on our partner's income to, to help us afford is something that you would, you would get and the lump sum would cover those things without their income being there.

If we were to unpack that a little further, how would you describe the problem that life insurance is meant to solve, especially for parents?

Yeah, I mean, it really just, it answers the scary question, like, would my kids be okay if I wasn't here anymore or would my loved ones be okay if I wasn't here anymore? It basically replaces the income or the care that you provide to your family and that they need you for. Right.

Most people set up their lives around both incomes in the households and, and if you were no longer there, it'd be very difficult and the lifestyle would need to change. Life insurance is there to make sure that they don't have to change their lifestyle without you there, at least financially. Right.

Like, they just make sure it takes one thing off their plate from a stressful, a very stressful, devastating situation, and they don't have to worry about, like, the financial burden of you no longer being there for them.

So along that line, then, is there a specific point in parenthood when life insurance sort of pivots from a Nice to have to something that we really need now.

Yeah, I mean it really. Most people we find start thinking about it right at the beginning.

Like we're talking pregnancy or early with your first child or even when you take on a big share debt like a mortgage. So it's pretty early on that couples see seem to kind of start thinking about life insurance.

It, it's, it's really meant for that phase of life when you're like, okay, we're making these big decisions and our lifestyles rely on our income to be there. And if my income would no longer be here, we'd have to make drastic changes to make our, our life affordable for us.

So it, it's really early on we find, you know, the average age for us is kind of early 30s to mid-30s. So pretty early in that parenting journey is when people are looking at this, at this for themselves.

So when you talk about income, many families think only the breadwinner needs coverage. Why is that sort of mindset potentially risky?

Yeah, it depends on the family.

I think if you are thinking about your lifestyle and you rely on a second partner to fill even like a care gap, even if they're not currently providing, are not bringing in like a, a significant source of income, they may be doing a lot around the home that would be left with like in a difficult spot if they were no longer here. Right. So Breadman, there's obviously replacing their income is super, super important.

It could leave a family in a devastating spot if the breadwinner was no longer there.

But for stay at home parents as well, there's the cost of childcare that would have to be replaced if they were no longer all that housework and all the invisible jobs that they do every day that would no longer be there.

So if the breadwinner is thinking about that and saying oh my goodness, I wouldn't be, I would need additional financial, financial help if my stay at home parent is no longer here. That's probably a place that you think about getting life insurance on their lives as well.

So part of sort of distilling life insurance is really understanding some of the terms. Can you take us through and break down in plain language term versus permanent life insurance? In the simplest language?

Yeah, yeah. So it's, it's slightly self explanatory.

So term life is kind of like for this stage of life where I'm at, you're typically covered for a set number of years. This could be 10, 20, 30 years.

It's often used to cover those years when your kids are Growing, they are not independent, they're not adults, they depend on you financially. And when your debts are at its largest, like when you're more, you're first taking out your mortgage, it's as large as it, it's meant to be.

Most people think about using this product to cover them until kind of like that close to retirement age. So if you're 30, you're looking at kind of a 30 year term. If you're in your 40, maybe closer to like a 20 to 25 year term, etc.

If you're in your 50s, maybe you're looking at some of the smaller term lengths. Permanent policies is for your entire life.

It is definitely used for more special cases where there's like big estates and you're thinking about estate planning, it's much, much more expensive. It can be.

You can go from looking at like $30 a month for a term policy to something like 10x that, 8 to 10x that for a permanent policy for the same amount of coverage. And it's just, it's not typically product that most young families are looking for. Obviously disposable income is hard at this stage of life.

You're in your most expensive like time, you have child care, you have your mortgage.

And you know, like really thinking about an expensive permanent product that has tax efficiency benefits may not be the right solution for you if you're like already not maxing out your RSP and your tfsa, for example.

So we typically recommend that like when, if you're not in that stage where you're really thinking about estate planning, you're mostly just thinking, oh my goodness, in the next 10 years, if I lose my partner, I'm going to be in a really hard spot. Is a better solution.

And it's where today I would say kind of 95% of our policyholders are going, they're looking for that kind of more affordable solution to protect the risk without needing that very expensive for life kind of type solution.

So how about for parents of young children or school age children? What type of insurance makes the most amount of sense for that category and why?

Yeah, so again for young families, term life is definitely the sweet spot for them. So you typically are picking a term length that covers you until your youngest child is kind of in an independent age.

So maybe if you have a five year old, you're looking for something like a 15 to 20 year policy until you're feeling good, like they're kind of out on their own and they're not, you're no longer paying for super expensive costs for them. You're probably looking at your debt and saying, okay, how many more years do I expect to be paying off my mortgage?

And, and like kind of matching your term length with that maybe little extra buffer.

But yeah, most are looking for that kind of 20 to 25 year length when they have a young family and they typically find that's like the, those are the years where you would really be in a very difficult spot if your partner passed away once you start nearing retirement. I mean, by definition you're kind of deciding that, oh, we have enough savings to, to support ourselves for the rest of our lives. Right.

Once you're in retirement, you're starting to pull on your savings versus necessarily on your future income. And that's when you're saying, well, if, if, if I were to live for the next 25 years, I would be fine financially.

You're probably, your partner's probably in a spot where if you passed away, they would be fine financially as well at that point.

So yeah, we're typically finding people are looking to cover them and in, in those years where like deaths at their highest and their kids are no, are not yet independent. So term life is definitely the sweet spot for that, for that person.

So along those lines then, a question a lot of parents will ask in tandem with what you've just described is how much coverage do we actually need? So what is a realistic way to think about that question?

Yeah, in the most complex terms, you're kind of looking at your income for the next 20 years and trying to understand like, how much am I going to need of that income if I were to pass away? I think most people have some rule of thumbs that make that decision a lot easier for families.

I mean, a really quick shortcut is kind of 10 to 15 times your annual income. And that would probably be enough to cover your family.

Obviously, if you just think of that total sum and you say if I had that, would I be able to like pay off some large debts or at least be able to cover my mortgage payment every month after my spouse were to pass away, plus kind of maintain the lifestyle that we are currently living is what you're looking for?

Would it, you kind of want to do that sanity check on like, would this roughly cover our house, our child care, some of our kids expenses until they're independent?

And some of the rules of thumb are kind of 10 to 15 times your annual income or just calculating the amount remaining on your mortgage plus a number five or six years times your income on top of that. There's a number of calculators out there. We have one on our website that you can use.

There's a number on, just on the Internet that you can use to get a good feel for kind of what the right amount is for you. Obviously you want to also look at like what you can afford. You know what I mean?

There's a lot of kind of competing financial priorities when you're a young family and you should factor that in as well. Right.

So kind of like taking both of those and triangulating kind of what you can afford at this moment times what you need and getting to a right number for you is, is a good idea.

We also have advisors that you can talk to who talk to people all the time and trying to work out that do kind of need a bit of a needs analysis, understand what their financial situation is and help them get to that number as well.

Well, and it's an important point because for the average parent, you know, projecting in the future and not really knowing, there's so many things that are uncertain on any given day. It's great to be able to have somebody who has that expertise to be able to advise you.

So when we're talking about certain stages of life, as a parent certainly is there anything else that you think parents need to know as it relates to life insurance being something that they need forever?

Yeah.

So I, again, it comes back to like, I see life insurance as something that's really needed during those years where your kids, kids are not yet independent and your debts are at the highest.

But as you start to build up savings over time, as you start to pay down your, your debts as your kids become older, most families can like start reducing or even dropping their coverage at that point. So you could kind of just stay in tune with your needs over time.

Like, just because you buy it in your early 30s doesn't mean you shouldn't be checking in in your late 30s to be like, do we still need this?

Am we reduce it or oh my goodness, has our lifestyle crept up and like we've been doing well for ourselves and we actually need a little bit more to increase that to, to save for that lifestyle.

Like I think it, it typically is something you need in those kind of in your, you know, late 20s, all the way through till your late 50s, but at that, but your needs change over time.

So it's something you should check in on every five years or something just to make sure you have the right AM that if you're, you don't need it as much anymore. It's something you can definitely reduce or drop over time.

So you say every five years. And I was going to ask you, like, what else should dictate when you go back and do that sort of reassessment.

Is it the stage of life you're in or is it your income at that moment or projected for the future?

Yeah, there's. Well, life events usually are a good opportunity to check in on this.

Like having another child, for example, could mean like maybe your, your current life insurance term length isn't long enough.

If you just had another child and you only have 10 years left on your insurance policy, for example, changing your living situation, like increasing your mortgage significantly is probably another time to check in.

And then, yeah, like promotions, obviously, if your income changes drastically, maybe like your, your total coverage amount needs to go up a little bit because you're kind of like your life cycle. Lifestyle. Lifestyle has increased a bit, which is great, but it's a harder thing to maintain if you were to pass away. Right.

And if that's your goal is so that your family doesn't need to have to move or doesn't need to kind of like change their, the fact that they're going on one vacation a year, that sort of thing. If you were to pass away, then like, you definitely want to check in on your life insurance coverage to make sure it's. If it's enough.

So on that note, then do kids need life insurance? And if so, what is the purpose of it?

Yeah, so our view as a company is that most kids don't need their own policy. Again, usually life insurance is something you want if you have people who are financially dependent on you.

So if your income were to go away, they would be put in a much tougher spot. Right. And with kids, it's like they don't have people who are financially dependent on them.

So it's less of a large need or a terrifying situation that you need to be covered for. Some parents do decide to get life insurance on their kids.

I would say the main reason is to like, perhaps lock in their future insurability, meaning, you know, if there's a reason that they become ill in their young years. And like, once they get to their childbearing age, it's a lot harder for them to get insurance, for example.

You.

Know, but it's quite rare and we typically advise parents to just kind of save for their children instead.

You know, like, there's a lot of expenses that your children are going to have in the future, whether that be education or their first home or things like that.

And we don't necessarily find that, like, life insurance policies for kids are the best thing that most parents need, given all the other financial priorities out there.

How about for parents with older children?

Let's say, what would you say to them in terms of, you know, supporting them to feel more comfortable about speaking to their kids about life insurance? Cause it's not easy for the average parent.

Yeah, I think, you know, financial literacy is so important for kids. Like, I imagine it's just something they're gonna need to know about.

And as they get into stages where they're becoming young parents themselves or they're taking on their first kind of mortgage or their first debt, like, they definitely will rely on you to help them think through what are the, like, the typical vehicles that they need to just, you know, to get through their responsibilities. And I think it's easy. It's a. You can kind of share when you got your first policy, what the.

How much you your insurance policy cost at that time, like, what, why you bought it, that sort of thing. So I think it's always good to talk to kind of your older kids about. About this type of stuff and like, help them out when they.

When they need it, especially when they become kind of young parents of them, their own.

We certainly live in a time of great uncertainty on a number of fronts. And I'm curious, Laura, what happens to work coverage if somebody changes jobs, takes time off or leaves the workforce entirely?

Yeah, so this is a good question. It's one that, like, people tend to get a little bit confused about.

So the great thing is, through work, you typically get a little bit of life insurance policy. So a common work benefit is probably somewhere between one and three times your income, which is awesome.

Like, it's definitely a great benefit to have and something to value with your work. A few things about this. First, work coverage tends not to cover your full need. Like, it's a good starting point and it'll be great for your family.

But if you just.

If you're in your early 30s and your spouse passes away and you only get one or two times their income, you will need to make drastic changes to your lifestyle, most likely. Right. It's not going to be enough. And so most people are looking at kind of getting an individual policy on top of that.

The other thing with your work policies is that it's not as reliable as an individual policy. So if you change jobs, like, you don't get to take those benefits with you to your new job. So it's going to disappear.

There are some work benefits that allow you to, to opt in to like follow me coverage. If you are to go to another job that doesn't cover individual or in group insurance like your current job does, but it's not guaranteed.

So I, I just recommend you kind of read your policy, make sure you know how much you're getting through work, what some of the, the situations are. If you were to leave that job, do you get to opt in?

Do you have like 60 days to opt into the follow me protection or anything like that after you leave? And just make sure you know the details of this.

Same thing with all group benefits, understanding the details of your disability policy, your health and dental insurance policies, it's just very valuable to understand kind of what happens if you leave the job or if you need to take time off the job. Does it stay with you during those, those moments as well as important to check. And it's not one size fits all. It probably changes by most policies.

So it's just, I'm sure it's something you can ask about and something to educate yourself on for sure.

Now it's interesting because you bring a dual lens to this topic as a professional in this space of insurance, but also as a mom yourself. So I'm curious as to what are some of the common mistakes that you see parents make around the topic of life insurance that you'd like to address?

Yeah, so I would say there's kind of two. One is definitely putting it off, which I like totally understand. Like it is, you're busy.

This is another thing on the to do list of a long list of things you need to do every day as a parent. And like, it just, it's just a hard thing to prioritize. And we get it.

The problem is if you wait too long to apply, there is a risk that something changes in your health that makes it much more expensive or even impossible to get insured. And the problem, like what I see too often is people have a health scare of some sort.

Maybe it's, you know, they need to get something checked out or they have an upcoming appointment that they're a little bit nervous about getting the results for. And those are all unfortunately like a little too late to get insurance.

Because when you are applying for insurance, you're going to be asked a number of questions about your, your health, about kind of like your lifestyle. And if there are triggers that make you quite risky to an insurance company, you will see your price go up or altogether get declined.

And so you don't want to, you actually want to apply in those moments where you don't feel like you, you need it. It's a little bit counterintuitive, but waiting to a health scare to apply for life insurance is probably a lot too late.

And that's where I think a lot of people get frustrated with the process, is that this is when they really want it and it's more expensive to get or it's more difficult to get. So that's one, one mistake I find that parents make and then the second thing is overpaying for like very fancy products.

And these are these like investment linked permanent products that can cost up to 300 or $400 a month.

I truly don't think if, if you're not currently maxing out all your tax free savings accounts and things like that, this is, this is not the product for you Get a typical, like an easy term life insurance policy. It should be somewhere between like 30 to $50 a month for a million dollars of coverage. That's all you need. Get 20 or 30 years of term.

And don't, don't get kind of oversold into something very complex that you don't understand because it's just, it's not designed for you. It's really designed for high incomes that are looking for fancy kind of estate planning vehicles.

But it's, it's, it's not, it's not designed for, you know, the average young, young parents.

That's really important information because I'm sure there's a lot of people that fall into that category.

Yeah.

Just by virtue of, you know, this not being in their sort of their sphere of, of knowledge and sort of the intimidation factor and all those things. So along those lines, are there any common myths about life insurance that you think really need to be addressed as well?

Yeah, I think some people can fall into trap that like only really high earners need it. Like it's, it's really for high income. I don't think that's true at all. You know, and the second one is that it's very expensive. Also not true.

Like our average policy I think is somewhere around $30 a month. Like it really is an affordable product. It's a lot less expensive typically than like your auto or home insurance policies, for example.

And I think people are pretty shocked when they, they get a quote for term life insurance and they're like, oh, I didn't know it was like this affordable. So I think that's, that's a myth that people need to, to realize that there are, like, really affordable policies that you.

You can kind of get in place and then kind of check it off your list and not have to think about it for too long after that.

What would you say, Laura, in terms of that busy parent who's got a lot on the go? We've talked about that already a little bit. Who's thinking, you know, I know I should do this, but I'm really overwhelmed.

What is a small first step that they can take along this journey of life insurance?

Yeah, so I think the first is just go and find a really simple calculator.

As I said, we have on one on our website that allows you to get a rough number of what you need and then get a quick online quote just to see how much it's going to cost you per month. And then take that away and see if that's like an. A number that you can swallow that's, like, affordable in your current situation.

And just, you know, just that first step is enough, you know? Yeah. I could suggest, like, you check your eligibility as well, which can be done online as well in probably like, 10 to 15 minutes.

Answer some of those health questionnaires, some of those lifestyle questions that they're going to ask you. But even if you start smaller than that, get that quote, get a sense for what it costs you and see if that's, like, the right number for you.

That's a great first step.

Lots of really important information for parents to consider. Thank you for distilling life insurance for us, Laura McKay, co founder and chief operating officer of Policymen.

Really appreciate your time and your perspective today.

Yeah, thanks for having me. That was great.

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