As I sit here typing while teaching my daughter piano, I can't help feeling content and blessed. Although life is certainly not all a bed of roses, I find that a thankful heart is indeed a happy heart. There is too much we take for granted in life. Our plan is to always be here for our family. I believe in God's protection for our lives, however, I do not want to be too arrogant to presume that I am always in control. Therefore, I do have Life Insurance purchased to protect our kids. I am the kind of person who is very practical and make decisions based on probability and risk percentages. Therefore, since the probability of my demise before I turn 65 is minimal, I have opted for minimum insurance. Basically, it will be enough to pay off the mortgage of the house (our only "debt"). If my husband survives, he can continue to live in the house and his income will be sufficient for the operating expenses of the household. If we both don't survive, the house can be sold and the people who have agreed to bring up our kids will have that money for bringing them up until they finish University. The cost of our Life Insurance for both of us is only $120 per year ($10 per month) - cheap, cheap - because it is a group insurance (Professional Engineer's group) with Manulife and we had purchased it many moons ago. What I have is a Term Life Insurance. When I leave the group, or when I reach 65, it is no longer valid. All the money I had put into it is not recuperated. I am ok with this because to me, it is a minimal cost for sufficient protection which I hope to never use.
I had a very interesting conversation with a friend a few days ago. She is a WFG (World Financial Group) agent. She showed me an interesting case study. It was for a couple who lives from paycheque to paycheque with no money for emergency fund, retirement savings, kids' education, let alone life insurance protection. In this case study, since the couple had equity built up in their house, if they take out an "interest only" loan to the limit that a bank would allow them (75% of the value of their house), they were able to pay off their mortgage, pay off their credit card bills, have money to put in a TFSA account as an Emergency fund. Since they no longer have debt payments to make and they have a lower loan payment (an interest only loan vs. a mortgage where the principal has to be paid off), they have more Cash Flow for a Universal Life Insurance policy, where part of the premium paid goes towards Life Insurance protection and part of the premium is used to invest in registered Mutual Funds of their choice.(Or they could simply get a Term Insurance and invest in an RRSP). The tax savings from the payment into the registered plan can then be used to create an RESP for the kids' education. So now, they have insurance protection, consumer debts paid off, retirement savings, savings for kids' education and an emergency fund to boot. I asked the question, "What happens if the couple lose their jobs?" If they did not do anything different, their house would be reposessed because they would not be able to make the payments. In the second scenario, they could take the money from their rrsp and emergency fund to make the minimum payments on their loan until they got another job, and not lose the house! She showed me that in 20 years, their net worth would be higher than if they did not do anything (even after they paid off the original loan).
Of course, the key to making this work is, if they had enough equity built up to allow them to borrow enough to cover the mortgage, pay off their debts and create an emergency fund. The increase in net worth will occur if the interest rates stay low, if their investments had returns higher than the loan interest rate and if they were disciplined enough to live within their means and not get into more debt.
I do consider myself a risk taker, but there are just too many "ifs" I can't control, for me to be comfortable with recommending that someone increase their debt load. My suggestion to this couple would be - downsize to a smaller house to get the money to do all of the above. Then, as their income increases, they could upgrade to a bigger house.
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