How stable does my income need to be?

How it works

one payment doing three jobs

Where a permanent premium goes

1. 01Part meets the cost of the insurance itself
2. 02Part covers the insurer's expense and the premium tax
3. 03Part builds the contractual value of the policy
4. 04The split is not itemised on an illustration
5. 05A level premium is fixed for the life of the contract

A commitment sized against an exceptional year fails in the normal year that follows, and the failure is expensive because the cost of putting the contract in force has already been spent. The useful exercise is to size against a weak year instead.

Sizing a commitment against a weak year is a joint exercise, not a rule applied unilaterally. The household supplies several years of actual income and its fixed obligations, and the Financial Security Advisor uses that history, rather than the current year alone, to propose a premium the household can defend in a year the current momentum does not continue. Some designs also carry a rider that waives the premium if the life insured becomes disabled, and whether that option exists, and at what additional cost, is itself part of sizing the commitment correctly, since it changes what a bad year actually threatens.

The cost or the catch

a licence is provincial, and so is advice

Where this practice is not licensed

1. 01No advice is offered to residents of those places
2. 02The explanatory pages remain open to anyone reading
3. 03A licence is provincial, and so is permission to advise
4. 04Checking a licence is a public register search

Take a low year of income from the past several, subtract obligations and a funded emergency reserve, and measure any commitment against what remains. A premium that only works in a good year is a plan with one assumption holding it up.

The bad news is that a commitment sized against a strong year does not fail gently. Coverage put in force carries acquisition cost and mortality charge from the first premium onward, so a lapse two or three years in does not return what was paid, and reinstating coverage later at an older age, or after a change in health, may cost more than the original design or may not be available at all. Sizing against a weak year is not caution for its own sake. It is what avoids paying that acquisition cost twice.

How to check your own

Looking at the last three or four years of income rather than the current year alone shows whether the figure being relied on actually holds up in a less favourable year. Income that varies little from year to year supports a commitment closer to its average, while income that varies a great deal calls for a premium set well below its strongest year. For the year that falls below even that lower figure, can I use the policy's own value to pay the premium sets out what options exist inside the contract itself.

What to ask, and of whom

the commonest reasons it fails

Who this method does not suit

1. A household whose income cannot carry an ordinary decade
2. Anyone who may need the capital in the first several years
3. Anyone who will not repay what they draw
4. Anyone who does not actually want permanent coverage
5. Anyone who cannot say what the contract is for

The question of whether a premium waiver rider exists on a proposed design, what triggers it, and what it costs, belongs with the Financial Security Advisor preparing the illustration, since that feature varies from one insurer's product to another and is not automatically included. The separate question of whether the commitment itself is sized correctly against the household's real income pattern is one the household answers first, with its own records, before bringing a proposed premium back to the advisor for a second look.

Where income comes substantially from self employment or from a single contract that could end, the household's own accountant is better placed than this page to say what a representative low year actually looks like once business expenses, quarterly tax instalments and irregular timing are accounted for, since those figures do not always match what appears on a personal account statement in a given month.

Who this matters to, and what it leaves out

four conditions and a purpose

Who this method suits

1. 01Households with durable surplus income, not one good year
2. 02People who already think about money in decades
3. 03People who want the permanent coverage in its own right
4. 04Owners and incorporated professionals with uneven income
5. 05Families arranging capital across more than one generation

This question matters most to a household earning through commission, seasonal work, or self employment, where a strong year and a weak year can differ by a wide margin, and matters least to a household on a stable salary with a long tenure, where the current year and the average year are close enough that sizing against either produces nearly the same premium.

What this page does not tell the reader is whether their own specific income pattern is stable enough for a specific proposed premium, since that judgment needs the household's actual figures set against the actual design, work the Financial Security Advisor does directly with the reader. It also does not address whether income replacement or disability coverage should exist alongside this contract to protect the premium itself if income stops, a separate question for the same advisor or another licensed professional, distinct from the coverage discussed on this page. That advisor is compensated by commission from the insurer on whatever coverage is ultimately placed, a fact worth keeping in view when a conversation about income stability turns into a conversation about additional coverage.

Step by step, sizing the commitment together

The sequence starts with the household gathering its own income figures, typically the last three to five years, along with its fixed obligations and whatever emergency reserve already exists, before bringing any of it to the Financial Security Advisor. The advisor then proposes a premium sized against the weakest of those years rather than the most recent one, and runs an illustration at that level so the household can see the guaranteed figures the proposed premium actually produces. Only after the household confirms that the proposed level is one it could sustain in a repeat of its weakest recent year does the application move forward to underwriting, where the insurer separately assesses the health of the life insured rather than the household's income.

Underwriting and affordability are assessed by different parties for different reasons: the insurer's underwriters care about mortality risk, not income stability, while the affordability question is one the household and the advisor work out together before the application is even submitted. Once the contract is in force, nothing about this sizing exercise repeats automatically. A household whose income pattern changes years later, for better or worse, is the one responsible for noticing the shift and asking whether the original premium still fits, since the insurer's own systems have no way of knowing that a household's income has changed unless the household or its advisor tells them so.

Where the disability waiver rider exists and is added to the design, its own cost is priced separately by the insurer based on the occupation and health of the life insured, and that cost is disclosed on the illustration as its own line rather than folded into the base premium, which is what allows the household to see exactly what the protection against a bad year is actually costing on top of the coverage itself. A household that declines the rider to keep the premium lower should understand that declining it does not change how the ceiling described earlier in this page is sized, since the underlying commitment still needs to hold up against a weak year on its own, waiver or no waiver. A household that has recently changed occupations, moving into or out of work that an insurer classifies as higher risk, should treat that change as a reason to revisit both the waiver rider's cost and the income figures used to size the premium, since either or both may no longer match what was assumed at issue. Raising that specific change with the Financial Security Advisor before it becomes relevant to a claim, rather than after, keeps the contract's terms aligned with the household's actual circumstances.