Family Finance

This section covers decisions made at the level of a household rather than a product: what comes first, how the specifically Canadian accounts work, and which commonly sold things are lower priority than they are presented to be.

The order that actually matters

Most financial harm in a young household comes from doing the right things in the wrong sequence.

Emergency liquidity first. Money reachable within days, without penalty and without borrowing. This is not an investment decision and it should not be optimised as one. Its purpose is to prevent a temporary problem from becoming a permanent one, and a household without it solves every surprise with credit.

Then protect the income the household depends on. If the household needs two incomes, or one, then the loss of that income is the largest risk it faces. That means life coverage, and for most working people it also means disability coverage, which is more likely to be needed and is more often absent.

Then registered contribution room. RESP where there are children, because of the grant. FHSA where a first home is in view. TFSA and RRSP according to circumstances and marginal rate.

Then, if surplus continues, longer-horizon structures. This is where permanent coverage for capital purposes enters, and not before. It requires durable surplus cash flow and a horizon measured in decades, which is exactly what a household still building an emergency fund does not have.

A presentation that arrives at step four while steps one to three are incomplete has reversed the order, and the reversal usually favours whoever is presenting.

Protecting a household income

The question is not how much insurance to buy. It is what would have to happen if an income stopped.

Term insurance is usually the right answer for a temporary need, and the need here is frequently temporary: it lasts until a mortgage is discharged and children are independent. Term covers a defined period at the lowest cost per dollar of protection, and that is the correct tool for that job. This is covered in whole life insurance, which handles the product comparison.

Disability coverage is the more likely claim and the more common gap. Group coverage through an employer often ends with the employment and may define disability narrowly. Reading the actual definition is worth an hour.

Mortgage insurance from a lender is not the same thing as life insurance you own. The lender is the beneficiary, the coverage declines with the balance, and it ends if you change lenders. Owning the coverage yourself keeps the decision about where the money goes with your family.

Education funding

An RESP is the starting point for most Canadian families, because contributions attract a federal grant. No other account offers a matching contribution of that kind, and that match is worth more than any investment decision made inside the account.

Three features are worth knowing before the account is opened. The grant is tied to contributions and to a child's age, so late starts lose room that cannot be recovered. Growth and grant are taxed in the student's hands on withdrawal, which is usually the point, because a student's rate is low. And there are rules about what happens where a child does not pursue eligible education, which are specific and worth reading rather than assuming.

Anything beyond the RESP is a general savings decision rather than an education one, and it should be evaluated as such.

A first home

The FHSA and the Home Buyers' Plan both exist, and they interact.

The FHSA is unusual in Canadian tax terms: a deduction on the way in and a tax-free withdrawal for a qualifying purchase, which no other account combines. Eligibility, opening deadlines and the period the account can remain open are all specific, and getting them wrong forfeits the benefit rather than delaying it.

The Home Buyers' Plan draws from an RRSP and must be repaid over time. It is a loan from yourself in the literal sense that missed repayments become income.

Which to use, and in what combination, depends on facts about your situation. The rules change and the amounts change, so this page states the structure rather than the figures, and the current figures should come from the Canada Revenue Agency or your accountant rather than from any website.

Coverage on children

Frequently sold, and usually not a priority. The honest position is worth stating plainly because it rarely is.

The financial loss a child's death causes a household is not primarily economic. Insurance answers economic loss. The amounts typically involved are small relative to what the household actually needs, and a family whose parents are underinsured while a child is covered has the position inverted.

There is one substantive argument and it deserves a fair hearing. Coverage acquired while a child is healthy establishes insurability. If a condition develops later, that coverage may be irreplaceable, and some contracts allow the amount to be increased at defined points without new medical evidence. That is a real feature and it is the only version of this case that stands up.

It comes after the parents are properly covered, not before, and anyone presenting it in the other order should be asked why.

Emergency liquidity, and why it is not an investment

Three properties matter and none of them is return.

Reachable quickly, meaning days rather than weeks. Certain in amount, meaning not subject to a market on the day you need it. Free to use, meaning no penalty and no tax event triggered by using it.

An emergency fund optimised for return has usually sacrificed one of the three, and it fails at the moment it is needed. This is the clearest case in personal finance where the correct answer is the boring one.

Teaching children about money

Not a product question, and worth a section because it is the part with the longest effect.

The evidence points at practice rather than instruction. A child who manages a small amount, makes a poor decision with it, and lives with the consequence learns something a lecture does not deliver. Errors made with small sums are inexpensive tuition.

Two things are worth being explicit about with older children: what the household actually earns and spends, at whatever level of detail is appropriate, and what things genuinely cost. Financial secrecy inside a family produces adults who find money frightening rather than adults who are careful with it.

Life insurance for a household, sized honestly

The question most families arrive with, and it is arithmetic rather than judgement.

What debt would remain, including the mortgage.

What income would need replacing, and for how long. Until the youngest child is independent, or until a surviving partner reaches retirement, are the two common answers and they produce very different numbers.

What specific obligations exist: education, a dependant needing lifelong support, a business or buy-sell commitment.

What already exists. Group coverage through work, which usually ends when the job does, and any individual policies already in force.

What would be available. Savings, a surviving partner's income, and any survivor benefits.

The remainder is the gap, and it should be rounded up rather than down: at term prices the cost of a little extra coverage is small, and the cost of being short falls on somebody else.

For most households the answer is term, and often a large amount of it. It does the job of covering a temporary obligation for a fraction of the cost of permanent coverage, and the details are on term insurance.

Insuring the parent who is not paid

The commonest gap in household coverage, and it is rarely raised.

A partner who does not earn a salary is doing work that would have to be replaced: childcare, household management, and the flexibility that lets the earning partner work as they do.

On their death, that work does not stop being necessary. It becomes paid work, or the surviving partner reduces their own hours to do it. Either way the household's finances change materially.

The amount is not the same as the earner's coverage and it is not nil, which is the figure most households implicitly choose.

A practical approach. Cost the replacement: childcare to school age, after school care, and the reduction in the surviving partner's earning capacity for as long as it would last. That number is usually larger than expected and is still modest at term prices.

Beneficiary designations, which cost nothing to get right

The highest-value hour available in household finance, and almost nobody spends it.

A named beneficiary receives the proceeds directly, in weeks, outside the estate, beyond the reach of creditors, and without probate where the province charges it.

Where the estate is named, or nobody is, all three advantages are lost.

Name a contingent beneficiary. If the primary dies first and nobody else is named, the proceeds fall to the estate by default, which is the outcome the designation existed to prevent.

Review after any change: a marriage, a separation, a birth, a death. The insurer pays whoever is named, not whoever was intended.

Quebec differs. A designation in favour of a married or civil union spouse is irrevocable unless stated otherwise, with consequences on separation that surprise people.

Tell somebody the policies exist, where they are, and who to contact. A contract nobody knows about is a contract nobody claims.

When a family's circumstances change

Five moments that should each trigger a review, and usually do not.

A birth. Coverage, beneficiary designations, guardianship in the will, and an RESP opened early enough for the grant to compound.

A separation. Designations, ownership of policies, and any obligation a separation agreement imposes to maintain coverage. A policy one spouse owns on the other continues unchanged unless somebody changes it.

A new relationship, with children from a previous one. Where the objective is protecting an inheritance rather than defeating creditors, the structure matters and the default outcomes rarely match the intention.

A death in the family. Both the immediate administration and the effect on everybody else's designations.

A move between provinces. Insurance is provincially regulated and several of the rules above differ, particularly between Quebec and the common law provinces.

The household habits underneath all of it are on why personal finance matters, and none of them requires a product.

Arrangements spanning more than one household are covered on private family capital, including where they most often fail.

What this section deliberately does not recommend

Permanent insurance on a child as a savings vehicle. For education, an RESP attracts a federal grant on contributions, which is money that does not exist in an insurance contract. The RESP comes first, and any discussion that reverses that order has reversed it for a reason worth asking about.

Complex structures for ordinary households. Trusts, holding companies and layered arrangements cost money to establish and to maintain, and for most families the statutory protections plus adequate liability insurance address the realistic risk.

Insuring the wrong risk. A household without adequate disability coverage, buying permanent life insurance, has inverted the priority. For most working adults the probability of a disabling illness during their working life exceeds the probability of death during it.

And anything before the emergency fund exists. Three to six months of expenses held in cash is unglamorous, generates no commission, and does more for a household's stability than any product on this site.

Disability coverage, which most households underweight

Named separately because it is the coverage most often missing and least often discussed.

For a working adult, earning capacity is the asset. It funds everything else, and for most people under fifty it is worth more than every other asset combined.

The probability of a disabling illness or injury during a working life exceeds the probability of death during it, and a disability leaves the household with the same expenses plus new ones, and without the income.

Group coverage through work is usually inadequate and it ends with the job. It is typically a percentage of salary, capped, taxable where the employer paid the premium, and defined against a broad definition of disability.

The definition matters more than the amount. Own-occupation coverage pays if you cannot do your own job. Any-occupation coverage pays only if you cannot do any job you are reasonably suited to, which is a much harder test and a much cheaper policy.

Individual coverage arranged while healthy is the version worth having, and health is the input that changes without warning.

This practice can advise on it, and it is worth stating that the compensation on disability coverage is a fraction of that on permanent life insurance. The ordering recommended here is not the one that pays most.

Critical illness and what it does differently

It pays a lump sum on diagnosis of a covered condition, after a survival period, regardless of whether the person can work.

It is not disability coverage and does not replace it. Disability pays income while you cannot work. Critical illness pays once, on diagnosis, and the money is unrestricted.

Where it fits is the gap the other two do not cover: the costs that arrive with a serious diagnosis and are not medical, in a country where treatment is publicly funded but the surrounding costs are not. Time off for a partner, travel, home adaptation, or simply the ability to stop worrying about money for a year.

The definitions are the product. Covered conditions are defined precisely and the definitions differ between insurers. Read them rather than the brochure, and ask specifically about partial payments for early-stage conditions.

It is optional in a way the first two are not. A household without income replacement or life coverage has a gap. A household without critical illness coverage has a preference.

The order, restated as a checklist

An emergency fund, three to six months of expenses, in cash.

Adequate disability coverage, own-occupation where available, individually owned.

Life coverage sized to the gap, usually term, on both partners including one who is not paid.

High-rate debt cleared.

Registered room used: TFSA first for most households, then RRSP, and RESP where there are children.

Beneficiary designations reviewed, primary and contingent, and somebody told the policies exist.

Then, and only then, permanent coverage or anything more elaborate, and only where the need is genuinely permanent.

Six of those seven cost nothing in commission, which is the most useful thing this page can tell you about how to read the rest of this site.

What a household should ask an advisor

Seven questions, none of which requires financial knowledge to ask.

What is the gap you calculated, and how? A number, with the working shown: debt, income replacement, obligations, minus what already exists.

Is my disability coverage adequate, and is it own-occupation? If this is not raised before life insurance, that ordering is worth asking about.

What is my non-earning partner insured for, and how did you arrive at it?

What would term cost for the coverage you are recommending? Ask even if permanent is being proposed, because the difference is the price of permanence and you are entitled to see it.

Who is named on each policy, primary and contingent, right now?

What are you paid on this, and what would you be paid if I bought term instead?

Who should not buy what you are recommending? An honest answer arrives quickly and names categories.

The last two are the useful ones, and the reaction to them tells you as much as the answers.

Why this section leads with what pays least

An unusual ordering for a page published by an insurance practice, and the reason should be stated rather than left to be noticed.

Because it is the correct ordering. An emergency fund, disability coverage and adequate term insurance address the risks a household is most likely to meet. Permanent coverage addresses a narrower need and suits a minority.

Because a household that gets the first steps right is better protected, and a practice describing itself as educational cannot recommend the profitable steps first and claim the description.

And because it is checkable. Anyone can verify that disability coverage costs less in commission than permanent life insurance, and that an emergency fund generates none at all. A recommendation that runs against the recommender's interest carries information that a recommendation aligned with it does not.

The compensation position is stated on the author page and at the foot of every page: paid by commission from an insurer when a contract is issued, nothing charged to a reader, and therefore not a neutral party.

Wills, guardianship and the documents nobody has

Adjacent to insurance and frequently the larger gap in a household's arrangements.

A will. Without one, provincial intestacy rules decide who receives what, and the result rarely matches what a couple would have chosen. Common-law partners are treated differently across provinces and in several they inherit nothing by default.

Guardianship for minor children. Named in the will, and it is the reason most young parents finally make one. Without it a court decides, without knowing the family.

Powers of attorney, for property and for personal care. These matter while you are alive and are the documents most often missing. Without one, nobody can manage finances, pay a premium, or respond to a lapse notice if capacity is lost.

A list of what exists and where. Policies, accounts, the advisor, the accountant, the lawyer. An arrangement nobody knows about is an arrangement nobody uses, and this costs an afternoon.

Quebec differs throughout. The Civil Code governs, notarial wills operate differently, and the protection mandate replaces the power of attorney for personal care.

None of this is insurance work. It is legal work, and a practice that arranges coverage without asking whether these exist has addressed part of the problem.

A household with adequate coverage and no will has protected the money and left its destination to a statute. Both halves of that arrangement matter, and only one of them generates a commission, and the other is the one a family notices first when it is missing, usually in the weeks after a death when nobody can find anything and no one has authority to act.

What changes when a child is born

The event that prompts most first conversations, and the one where the ordering is easiest to get wrong.

Coverage on the parents, not the child. The financial risk is a parent's income stopping, not a child's. Coverage on a child addresses insurability and a very long horizon, which is a different question and rarely the urgent one.

A will and a named guardian, which is the reason most young parents finally make one.

Beneficiary designations reviewed, on every policy including any through work.

An RESP opened early, because the federal grant on contributions compounds with the time remaining.

And disability coverage checked, since a household with a new dependant has just increased what its income has to carry.

What changes at a separation

The event that undoes more household planning than any other, and the one nobody prepares for.

Beneficiary designations do not change themselves. A former spouse named on a policy remains named until somebody changes it, and the insurer pays who is named.

Ownership of policies is a separate question from the designation, and a separation agreement may address one and not the other.

In Quebec a designation in favour of a married or civil union spouse is irrevocable unless stated otherwise, which constrains what can be done afterwards and surprises people at the worst moment.

Support obligations may require coverage to be maintained, and the agreement should say who owns it, who pays it, and how the other party confirms it is still in force.

Group coverage through work may cover a spouse who is no longer one. Worth checking rather than assuming.

What this section does not own

Transfer between generations. That is an estate question, governed by the deemed disposition, probate and beneficiary designations, and it belongs to estate planning.

The strategy applied across a family. Where a household runs a capital strategy across generations, that belongs to the strategy section, which covers the approach practitioners describe as infinite banking, a term originated by Nelson Nash.

Product mechanics. Cash value, dividends and advances belong to policy basics.

Comparisons against registered accounts. Those are arguments rather than descriptions and belong in objections and risks.

What to do first, in practice

Three actions, none of which requires buying anything.

Work out how long the household could function with no income. The answer is usually shorter than expected and it establishes the size of the emergency fund.

Read the actual definition of disability in any group coverage you hold. It is frequently narrower than assumed.

Check what registered room is unused. The notice of assessment states it, and for most households that room is the better use of surplus money before anything else is considered.