No simple formula for determining ideal amount of life insurance

Life insurance is an important financial consideration, especially for people with homes and families, but how much is enough? That was one of the issues raised in this week’s batch of reader questions.

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Q: I​’m a 35-year-old non-smoker making about $70,000 a year, with a wife who stays home with our two children, ages two and four. Our only major debt is the $200,000 mortgage on our home, bought five years ago for $300,000. Realistically, how much life insurance do we need? Through work, I’m covered by a policy equivalent to a year’s salary.

A: Caroline Nalbantoglu of CNal Financial Planning said there’s no easy answer because of variables like current expenses, likelihood of the spouse’s return to the workforce and expected duration of the insurance settlement in the event of death. Insurance to cover the mortgage debt is only the starting point. More coverage clearly is needed for the family if the salary of the primary earner cannot be fully replaced. For this particular family, $500,000 probably is a minimum, Nalbantoglu said. “It is always better to err on the side of too much insurance while the children are young, as one does not know what the future holds.” Term insurance provides the “biggest bang for the buck,” she said, “and I usually suggest a 20-year term until the children are independent.” Insurance needs can be readjusted later in life, depending on the circumstances.

Q: A friend, a student, is day trading in his tax-free savings account (TFSA). Is this allowed?

A: In principle, no, but it’s a grey area. The Canada Revenue Agency doesn’t actually specify how many transactions and what sort of holding time it considers acceptable for a TFSA to remain an untaxed investment account rather than an income-generating business. But some TFSA holders have been challenged on it, and your friend should be aware it could also happen to him.

Q: My question relates to registered accounts and the death of one spouse. My understanding is that if one spouse dies, his or her RRIF or RRSP can be transferred in its entirety to the surviving spouse. But what about the TFSA, and if so, is the transfer amount limited by the surviving spouse’s contribution room?

A: A surviving spouse is entitled to deposit into his or her TFSA an amount equivalent to the value of the deceased partner’s TFSA at the time of death without affecting their own TFSA contribution room, but in Quebec, they must be designated as beneficiary of the TFSA in the deceased’s will. The funds also need to be deposited within a year of the death, and the surviving spouse is required to complete and submit to the Canada Revenue Agency federal Form RC240 (Designation of an Exempt Contribution TFSA) within 30 days of the contribution being made.

Q: The last few years, I’ve been able to claim the provincial tax credit for seniors’ activities for participating in a bowling league. Usually I get a receipt from the bowling alley, but this year I wasn’t able to get one because of the COVID-19 lockdown. Should I include a note with my taxes giving the name of the bowling alley and league, the cost and number of weeks bowled in 2020?

A: Keep the note for your own records, but don’t submit it with your tax return. Revenue Quebec doesn’t want more paperwork than necessary. If it’s interested in double-checking your claim, it will let you know.

The Montreal Gazette invites reader questions on tax, investment and personal finance matters. If you have a query you’d like addressed, please send it by email to Paul Delean at [email protected].