‘No charge’ for mom – Are you insure about that?

The economics of a mom’s love

There’s an old country song “No charge”, made famous in Canada in the 1970s when Tommy Hunter recited it on an episode of his CBC TV show.

While a mother is preparing the family dinner, her young son comes to her with a piece of paper. On it is a list of chores and charges, and a tally: $14.75. She pauses, wipes her hands on her apron and takes up a pen. She turns the paper over and lists all the acts of motherly love from childbirth to sleepless nights and kissing bruises, writing “no charge” next to each.

Well, with tears in his eyes, the son looks up and says, “Mama, I sure do love you.” Then he takes back the page, and in big letters writes, “PAID IN FULL.”

Identifying and measuring unpaid work

It’s a blatant pull at your heart strings – as a good country song is wont to do – but at the same time, there is truth in those words.

Time spent on unpaid household/family activity

Every few years Statistics Canada publishes a series of research papers on Women in Canada.[1] From its 2018 report, here are some key observations on the economic well-being of women:

- Women are more likely than men to participate in housework activities, and they spend more time doing so.
- Both mothers and fathers spend more time on childcare than thirty years ago, but women have increased their time with children to a greater extent than men.
- A greater proportion of women than men perform routine childcare tasks on a given day, and spend more time doing so.
- Women are overrepresented as caregivers to adult family members or friends, particularly when the care recipient has a long-term health condition or a physical or mental disability.

This is a big picture view of the relative amount of time spent by men and women, and how it has changed over the years – and in some ways how it hasn’t. Apart from the time aspect, can we put a dollar value on this?

What if mom was on a salary?

Each year around Mother’s Day, the website salary.com publishes an estimate of what a mom would earn if paid in the open market. While acknowledging that it cannot assign a value to all features of parenthood, the site draws from about three dozen job categories to represent the core competencies of motherhood. Its most recent estimate of median annual salary for a stay-at-home mom is US$184,820. And as if it’s necessary to point out, the figure is even more compelling when converted to Canadian dollars.

Of course, this is mainly a promotional exercise for the website and its services, but it helps illustrate the wide breadth of a mother’s contribution to the family, on top of it being unpaid.

The paid work picture

The Statistics Canada research notes that, “historically, women’s financial security has been closely tied to their familial relationships with men.” This is looking back from the mid 20^th century, referring to a woman’s father while she was growing up, then her spouse/common-law partner as she moved into adulthood.

Progress over the decades

Labour force participation of women increased from the 1960’s, at the same time as women were gaining more access and control over household resources. Since then, women’s economic well-being has evolved dramatically, again as compiled by Statistics Canada:

- Women’s average personal income more than doubled in constant dollar terms from 1976 to 2015, with the gender disparity in income being cut in half over that 40-year stretch.
- Women’s earnings make up a larger share of family income than ever before. In families with a working woman in the core working ages of 25 to 54, the woman contributed 47% to the family’s income in 2015.
- Women’s workforce participation has enhanced the security of couple families. These families are more resilient to the rising cost of living, downward wage pressure for men, and unemployment generally.
- Dual-earner families are also better protected in recessions, with women experiencing fewer job losses due to their larger representation in non-cyclical sectors such as education, health care and government.

For her, and those around her

These trends in women’s work participation and income growth are self-evidently beneficial to affected women personally. As well, society overall is better off, both in the social sphere and in the economic benefit of the fuller participation and contribution of women. And finally, spouses and families are able to enjoy more abundant, diversified and stable financial lives.

And without mom? – The role of life and disability insurance

There is plenty that can be learned from the Statistics Canada research and other sources about the state of women in our society. It can and should motivate individual and collective action toward greater gender equality.

For current purposes though, let’s look at what this means at the individual or family level. In particular, what economic hardship will befall a family if mom dies or becomes disabled, and where does insurance fit in?

Loss of income source

While life and disability insurance have many uses, their primary purpose is to replace lost household income. The positive progress in women’s employment and income over the decades provides both direct and indirect evidence of why and how much harm may be inflicted if tragedy hits. There’s double damage in the case of disability due to additional cost of care, and of course it’s especially devastating for a single mother family.

The obvious direct impact is the actual income that is no longer coming in. The less obvious part in the case of a dual-earner family is the loss of stability and diversification. Though it may not be easily quantifiable, it would be helpful for a couple to anticipate how the death or disability of one of them could affect the practical and financial viability of the survivor’s continuing occupation.

Loss of that unpaid labour

This brings us back to all that time mom spends on unpaid household/family activity. In mom’s absence, some of those tasks may be replaced by bought services, but money is no proxy for a parent’s presence, love, affection and attention. To continue to fulfill that role, dad may need to change his work routine, and possibly even make some broader career adjustments.

In this respect, in addition to replacing mom’s lost income, insurance can also stand in for the reduced income dad may experience due to increased caregiving demands. Whether this is a temporary measure or a permanent new normal, the family is given the time to grieve, heal and look to the future in financial security and comfort.

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[1] Women in Canada: A Gender-based Statistical Report
https://www150.statcan.gc.ca/n1/pub/89-503-x/89-503-x2015001-eng.htm

Insurance and your child

Protecting the lives of your family, for the lifetime of your family

There is nothing more devastating to a parent than to have a son or daughter predecease them. We expect to raise our children to go out into the world, so witnessing their departure from it prematurely is not something a parent expects to be dealing with. It’s called a death out-of-order for good reason, as it does not fit the natural order of things.

Even so, the suggestion to obtain life insurance on a child can be unsettling to a parent. After all, the primary purpose of insurance is to replace lost income. The child doesn’t support the family; the parent does. To some, insuring a child may seem like a gamble for a payout upon a tragic and unlikely event.

However, the reality is that a child’s death can have significant consequences for the entire family. Insurance can provide the time, space and resources for people to heal. And in the more likely scenario where misfortune does not occur, it can then be a valuable tool to give your children a financial head start in life.

Financial cushion for recovery

Beyond the initial shock and expense of dealing with the loss, parents will need time to grieve. While many employers provide bereavement leave, it may not be enough for many parents to adequately recover.

With insurance acting as an income bridge, parents could choose to spend more time away from work until they are truly ready to return. Or for parents who run their own business, insurance could be used to sustain operations in their absence, for example to fund employee overtime, hire temporary staff or otherwise provide a cash infusion while activity slows.

And while this extended time is a welcome reprieve, it does not in fact heal all wounds.

Both parents and siblings of the departed child will have their own ways of coping. Some may be comfortable leaning on one another or confiding in friends, while others may need more. Insurance can help with the cost of professional counselling, allowing each family member to take whatever time they need and to use whatever process suits them best.

Types of insurance to choose from

Once a parent sees how insurance can help them manage such traumatic circumstances, the next consideration is whether to use a term or permanent policy. Term insurance is intended to last for a specified number of years, whereas permanent insurance is expected to be held for life. In either case, the insurer’s premium cost is based largely on the low risk of death of a young child, which in turn helps make it affordable for parents.

Generally, the least expensive option is for a parent to add a child term rider when they purchase their own insurance policy. Most insurers offer this coverage on a child up to a certain age, usually 25, at which time it is normally then convertible into permanent coverage.

Alternatively, the parents could choose permanent coverage right away, commonly a term-to-100 or whole life policy. Of the two, term-to-100 is lower cost, but whole life is often preferred as it can generate annual dividends that build its cash surrender value over the years. What’s more, that growth is tax-sheltered.

Tax-sheltered savings for education and more

Far and away, the greater likelihood is that a child progresses through their youth to become a thriving young adult. In that case, parents may wonder whether those past insurance premiums are a lost cost. The answer is that the financial cushion discussed above is only part of the case to be made for obtaining the insurance.

Built on that foundation, insurance can be an effective tool for a child’s own future financial needs. A familiar strategy is to use the tax-sheltered cash surrender value of a whole life policy to complement a Registered Education Savings Plan (RESP) for post-secondary education.

As policyholder, a parent could withdraw part of the cash value, arrange a policy loan with the insurer, or pledge the policy as collateral for a loan from a separate lender. An appealing part of the withdrawal option is that there is no interest charge in comparison to the loan options. On the other hand, if a large withdrawal is taken, it may be partially taxable. Even here though, there is a way to get some relief.

An income tax rule allows a parent to transfer a policy on a child’s life to that child on a tax-free basis. If the child then makes a withdrawal while over age 18, it is the child who will bear the tax, if any. Assuming that the child is a student with minimal income at the time, it is likely that there will be little or no tax to pay. It is also worth noting that money coming out of an insurance policy may be used for any purpose, not just for education.

For a child’s own future family

As children move further into adulthood, they will take on greater responsibilities, including having their own families. Like their parents, these new adults will have financial obligations to those families.

Insurance established in those early years and transferred to the child can now be used as a safety net for the new family. Of course, the amount of coverage needed will be larger than the original amount on the policy, so additional coverage may be sought.

But what if the son or daughter becomes disabled through an accident or develops a severe medical condition? How would that affect the policy? Fortunately, the insurance established in those early years may continue, even if there is a later diagnosis that makes the person uninsurable thereafter. As well, many insurers offer a guaranteed insurability rider to their policies, allowing future increases in the amount of insurance (within limits) without having to prove medical eligibility.

As these examples show, life insurance is not merely on a child’s life, but can be for a child’s life. It is a way for parents to preserve and pass on family values, both in financial sense and in sharing their beliefs.

Business and life insurance

Risk management for the entrepreneurial set

True entrepreneurs don’t take risk – they assess it, exploit it and overcome it.

That assessment process requires an understanding of market gaps so you can frame a vision for your business that capitalizes on those opportunities. It is then up to your entrepreneurial initiative to plan and deliver the business. But none of us are infallible or invincible.

Contemplating your limitations – and especially your own mortality – is a sensitive area emotionally. But not being informed can be far worse in reality.

That’s why life insurance is such an important tool: to preserve the business, which in turn protects the family it supports. Even more though, it rounds out your business planning by shining a light on latent risks, providing comfort to lenders to advance funds (with potentially improved terms), and offering tax advantages unlike any other financial tool.

Five fundamental questions in your insurance decision

Insurance is not a frequent conversation topic for most people. In its simplest elements, you pay premiums to an insurer, and it pays out the face value of the policy on a death. Premium payments are not generally tax-deductible, but proceeds are received tax-free.

Appreciating it in a business setting adds a layer or two of complexity. In addition to assuring that all risks are identified, you need to consider the cost-effectiveness of premium payments and the tax-efficiency of the proceeds payout.

At a minimum, five questions have to be addressed in any insurance discussion:

1. What purpose does this insurance policy serve? In insurance-speak, the ‘risk’ is that a death occurs, and the ‘peril’ is that some economic damage will result. So, what damages are you protecting against?
2. What duration is the insurance needed for? Put another way, at what point in time will there no longer be a peril/damage to be concerned with, or will it always be there?
3. Who should own the insurance? This is who pays the premiums. In a personal situation, you may own on yourself, or spouses on each other, or parents on children – and there can be more variations. For a business, particularly when run through a corporation, there are at least as many considerations, including whether to own from within the business/corporation, or outside in personal hands.
4. Who should receive the proceeds? In some cases the recipient may be the owner, while in others it may be one or more named beneficiaries. In a business situation (again where a corporation may be involved), there can be many steps involved, requiring coordination with other personal and business documents, including trusts, Wills, corporate resolutions and shareholder agreements.
5. Finally, what amount of coverage is appropriate? This brings it full circle to the economic exchange you have with the insurer. Having asked and answered the preceding questions, you are now ready to turn to quantification, and affordability.

Four principal business purposes for insurance

Especially in a single-person operation, the overlap between personal and business needs can appear almost indistinguishable. Discerning the differences is critical to being able to make the best-informed decisions. Though not an exhaustive list, here are the most common situations for the use of life insurance in a business.

Buy-sell funding

A buy-sell agreement is only as good as the ability of the parties to carry it out. In the fullness of time, the expectation will be that each party will have the financial wherewithal to execute a buyout.

An early death can thwart that intention, potentially putting the business, the continuing owners, and the deceased’s family at risk. Insurance enables timely payout to the deceased’s survivors, and smooth continuity of the enterprise for the continuing owners.

In the case of a corporation, it is most prudently documented in a binding shareholders’ agreement – not just drafted, but executed.

Key person protection

Insurance can buy time for a business when someone critical to the operation is lost. It’s an injection of capital to help maintain the going concern value of the business on the loss of that key contributor.

Whether or not the deceased was an owner, the cash acts as a financial bridge until a suitable replacement can be found, or at least until operations can be stabilized.

It may also include an estimate of direct lost revenue and extraordinary expenses.

Estate tax liabilities

Tax on capital gains will arise when someone consciously disposes of capital property, or on a disposition that is deemed to have occurred in certain circumstances such as a person’s death. This applies to all business interests generally, though if the assets are qualifying small business corporation shares, the door is open to take advantage of the lifetime capital gains exemption, currently standing at $1,250,000 in 2024 (per the 20204 Budget), with indexing to re-commence in 2026.

If there remains tax liability on a capital disposition, it can be deferred if those assets are rolled to a surviving spouse. The deferral will carry through to when the spouse disposes of the assets, or on a deemed disposition on the spouse’s death. Either way, insurance still has a role to play, but now taking into consideration more participants in the arrangement.

Income replacement

The most common use of life insurance is as a proxy for the lost income-earning capacity of a breadwinner to a household. The insurance proceeds fund a pool of wealth that can be drawn down over the time that the deceased would have otherwise contributed income. Though not physically present, the person is still there in financial spirit.

Seeing the purposes both together and apart

The first three of the foregoing purposes are clearly commercial in nature, whereas income replacement is a personal need irrespective of the existence of any business. Even so, it is not uncommon for a business owner – and particularly a shareholder running a corporation – to wish to combine multiple insurance needs into a single contract held in the corporation, or multiple policies some of which will be held at the corporate level.

This may make good sense for convenience as a gathering point and for cost-efficiency, but care must be taken to assure that the calculated amount for each respective purpose will make it into the hands of the appropriate recipient. This will often require the coordination of terms in shareholders’ agreements, Wills and corporate documents, so early involvement of legal counsel is a prudent approach.

Assuming this all passes muster, attention may turn to the tax implications of funding and receiving insurance through a corporation.

Use of a corporation, and life insurance within it

Except in very limited circumstances (none of which apply here), life insurance premiums are not tax-deductible for a corporation, no more than they would be for personally-owned life insurance.

However, corporately-paid premiums are nonetheless less costly than personally-paid premiums. The comparison is whether the corporation pays the premiums itself, or issues a dividend to the shareholder to pay the premiums personally. As the shareholder will be taxed on the dividend, less cash would be available for the purpose in those personal hands, thus requiring a larger dividend in order to net down to the required dollars for the premium cost.

On death of the life insured, the proceeds are received tax-free to the beneficiary, whether that beneficiary is a corporation or an individual. For a policy owned in a corporation, the corporation itself or a subsidiary corporation would be named as beneficiary; if not, the payment of the death benefit could give rise to a taxable shareholder benefit. (Similarly, a shareholder benefit would apply if a corporation pays the premium on a policy owned by a shareholder.)

Comforting though it is to know that a corporation receives insurance proceeds tax-free, even these business-based needs (except key person) still ultimately require the insurance proceeds to make it into personal hands to complete their intended purpose. Fortunately, there is a mechanism that allows for the transfer of tax-free amounts received at the corporate level to make their way into shareholder hands.

A corporation’s capital dividend account or CDA keeps track of items such as life insurance proceeds and the non-taxable portion of capital gains. Declared dividends to a shareholder will not be taxable if they are elected to come from the CDA. This election may also apply to deemed dividends that occur when shares are redeemed, for example when a surviving spouse decides to wind up the corporation after the death of a business owner spouse. Whether the full amount may come out tax-free depends on circumstances, but the bulk is usually treated this way. Again, informed legal and tax advice are a must, both at the time the insurance is established and when the payout happens.

Be aware that these are the fundamentals for understanding corporate ownership of life insurance. Things can get much more complicated in practice, which is why conscientious due diligence is critical – both in comprehending the technical issues, and in clearly understanding the needs of the business and the individuals behind it.