Life insurance a better financial plan

Clients donating 10% of their monthly income to charitable causes is probably less common today but for those that do it’s probably wiser to use life insurance to accomplish the same thing and here’s why

The Financial Post’s Family Finance column recently profiled a couple in their 30s who carry significant debt while also donating 10% of their take-home pay to charitable causes and feeling the pinch.

At the top of the list of recommendations made by Matthew Hall, an Ottawa chartered financial analyst and financial planner with Exponent Investment Management Inc., was for the couple to purchase life insurance.

Here’s why.

“They want to reduce debt aggressively, but they have other goals, such as maintaining a rate of contribution to charitable causes of about 10 per cent of take-home income,” Hall said. “Their expenses exceed income by almost the exact amount of the contributions, but we do not challenge that. Instead, we’ll find solutions to their cash flow problem and a system for financing both the educations of their children and their eventual retirement.”

Life insurance becomes one of those solutions.

The couple’s take-home pay is approximately $5,687 a month. They were putting $610 monthly toward tithing and that amount, not coincidentally, was the amount their monthly expenses exceeded their income.

Hall reasoned that if the couple were to purchase a $200,000 joint last to die life insurance policy they could save $440 per month of their cash flow by eliminating the monthly tithe and replacing that with the policy proceeds.

Why $200,000?

That was the future value of their tithe over 22 years from today through the husband’s retirement at age 60 accounting for a 2% yearly inflation increase. The move would balance the budget.

Hall then cut into the budget by another $450 by consolidating all their debts into a single home equity line of credit and those savings would be plowed into the children’s RESPs so all three could attend university in the future.

But it all started with life insurance.

“The critical factor in this plan is deferring the $610 a month charitable donation cost by use of life insurance at a huge monthly saving,” said Hall. “If they do that, the plan will work.”

To read the entire Family Finance article click here.