Family-focused: how to protect your loved ones
I’m a bit of a cynic – I can’t help it. I question my surroundings and ground myself in the peace and comfort of statistics, science, math and all things personal finance. If you were to talk to me about palm readers or astrological signs, you might notice a strange look coming over my face as I try to hide my skepticism. So, when in the first weeks of her pregnancy, my wife told me that she thought we might be having twins… I had my doubts. Why would we have twins? There was no history of twins in my wife’s family, so where would the “twin gene” come from? She had been experiencing dreams about having twins, but there was no tangible evidence! We would joke back and forth about it, with me betting on a single child and her betting on twins. Like I said, I’m a cynic.
I remember vividly the day of our first ultrasound appointment, just a month or so into the pregnancy. Our appointment was at 9:40 am at a radiology clinic in Riley Park, Calgary. After a few anxious minutes of waiting, the ultrasound technician walked into the room. She gave us a brief introduction to let us know what to expect. Then, she explained that she’d be taking measurements to determine the date of conception so she could provide us with a target due date. It was too early to hear a heartbeat just yet. After taking a set of measurements, she nonchalantly said that she would now take the measurements for “the other one.” My wife and I looked at each other and burst into laughter. You could say that my wife’s motherly intuition had handily beaten my logic, but we were both winners that day. We went out for a coffee to digest the information before both heading back to work for the afternoon.
I remember two distinct moments later that day.
First, back at the office I asked Russ Doherty, my long-time boss and mentor, to step outside the office with me so that I could have a word with him. After my parents, whom I had called on the way to the coffee shop, Russ was the first person I told. I’d say that I’m a fairly even-keeled guy who does well under pressure. However, I remember being so overcome by the emotions of the situation that I started to cry, as I struggled to say the words to share the news with him. These were not tears of fear or apprehension; rather, the enormity of the news of having not one, but two children had truly rocked my world.
The second moment I always remember about that afternoon came a few hours later. I had since collected myself and was on my way home. I was walking to my car, which I used to park on the other side of the river from downtown. As I crossed the bridge, deep in thought about the day’s events, I ran into one of my clients, Marc, a family man with three children of his own. I knew that I wasn’t supposed to talk about the pregnancy so early on, so I was going to simply say hi and continue onward. But in that moment, my adrenalin was pumping and I was only thinking about one thing. I blurted out “Marc, I’m going to be a dad and I’m going to have twins!” We fist-pumped and did things that manly men do in such moments. Marc and I still laugh about the exchange we had on the bridge that day.
Emotions are powerful, and if you listen to them, they can be quite insightful as well. It‘s the things in your life that elicit the greatest emotional reactions that you really need to pay attention to and plan for. I knew that day, long before my daughters were born, that I needed to take some steps to protect my family and set up a plan for their future. There were three things in particular that I needed to re-evaluate and revise.
The first thing we did was reevaluate our life insurance coverage. I’m a strong believer in having private insurance coverage, that is, insurance that you have outside of employer-sponsored group plans. The idea here is that you, not your employer, should be determining what insurance is appropriate for you and your family. Private coverage also ensures that if you change jobs or have periods of unemployment, your coverage will remain in place.
We’d previously had enough insurance in place to cover our mortgage and a bit extra for flexibility, but ended up doubling our coverage with children on the way. We kicked around the pros and cons of individual coverage versus joint coverage, but ended up landing on a 20-year term joint-first-to-die policy. The joint coverage was the most affordable way to cover off our pure insurance need, as it will pay out on the death of either my wife or me, whoever dies first. We chose a 20-year term product because this allowed us to fix our insurance costs until our children would be launched into adulthood.
We wanted to get the insurance in place before the children were born, because we knew the demands on our time would be greater after they were born (we weren’t wrong!). This also allowed us to cover off the slim risk of complications during childbirth. For the record, I think there are good reasons to explore individual life insurance coverage (as opposed to joint), and even permanent insurance products as well. We felt that a joint term policy was best for our family. With any decision like this, it’s important to have a thorough conversation with someone qualified, to help you determine what’s best for your situation.
The next important thing for new parents to review is their estate documents. I strongly believe that everyone should have three important documents: a will, a Power of Attorney, and a Personal Directive. Your will lets you choose guardians who will be responsible for raising your children if you die. It also dictates who will receive the assets in your estate, and what control measures you’d like to apply to those testamentary gifts. If you die without a will, you’re said to have died “intestate.” The laws of intestacy are different in each province, and the result is often quite different than you might expect. For example, if you think that your spouse will “get everything,” you’ll be surprised to know that he or she may receive a smaller share than your children, depending on which province you live in and the size of your family.
A Power of Attorney allows you to assign control to someone to manage your property (e.g. finances) while you’re alive, either immediately or upon some trigger event (e.g., lack of capacity). A Personal Directive allows you to assign someone who can assist in making personal (e.g., health, medical) decisions if you’re unable. These are all incredibly important documents that are doubly as important when you have a family to consider.
The birth of a child is also an important time to reflect on your investment strategy. I’ve written before about RESP accounts, and I’m a firm believer that they’re phenomenal savings plans for parents who expect their children to pursue post-secondary education. My general advice is that the day you obtain your child’s Social Insurance Number should also be the same day that you open an RESP account. I like to describe the RESP as a TFSA with an automatic 20% return on your money. This is due to the fact that the federal government provides a 20% matching annual grant (capped at $500 in grants per year and $7,200 over the lifetime of the plan), and the income earned inside an RESP is ultimately taxed to the student. Most students will not have enough income to actually pay any tax. There are rules that need to be followed and your financial planner will be able to help you out as well.
But don’t just blindly funnel every spare dollar into your RESP. You really should have a thorough discussion with your planner about where to allocate your savings, be it an RESP, TFSA, RRSP or cash account. These conversations should tie in with your family planning. The best time to start planning your investment deposits is when children are still conceptual (i.e., years away).
For example, Canada has a tax-free benefit program for parents called the Canada Child Benefit (CCB), which I’ve written about in the past. The key planning point to consider here is that the amount you receive is based on your combined family net income. If your family income is low, you get a larger CCB payment. If your income is high, you get a smaller amount – or nothing at all. It also depends on how many children you have. As you can see, the rules can be complex, but the potential financial reward warrants some thought and attention.
For those who have limited savings capacity and need to choose whether to contribute to a TFSA or an RRSP, I’ll often recommend that if you’re planning to have children (but don’t have any yet) to first save inside your TFSA as a stopgap. The plan would be to transfer the TFSA savings into the RRSP of the higher income spouse once you have children. The RRSP contribution at that point would not only attract a tax refund based on the marginal tax rate of the contributing spouse, but it could also generate a significant CCB payment.
For families who have a higher income, a large RRSP contribution could be timed for the same year as a maternity or a parental leave. The working parent (still with a high marginal tax rate) would make the RRSP contribution. Meanwhile, the maternity leave will result in a lower than typical income year for the other parent. When the RRSP contribution and maternity leave are combined, the result could be a single year of CCB payments that are received when, in most years, this family’s entitlement would be zero. As you can see, the planning should start early and the window of opportunity to capture a benefit can sometimes be quite narrow.
These are the financial issues that I think are most relevant for new families, but in the end, I suggest you take a moment to reflect on the things in your life that you spend the most time thinking about. Where are you most emotionally invested? This will give you a good idea of what you need to protect, and where you should focus your planning and attention.
Aaron Hector, Vice President & Financial Consultant, Doherty & Bryant Financial Strategists, a trademark and business name of iA Investment Counsel Inc.
Quebec will match an additional 10% of your annual RESP contribution. British Columbia offers a one-time Training and Education Savings Grant if you contribute to an RESP. Saskatchewan’s program has been temporarily suspended.