Last updated: December 17th, 2020
Please send comments/edits to nanaeem@uwaterloo.ca. It is much appreciated.
I will admit I know very little about making a will. Most of what I know was learned from helping my parents get in touch with a lawyer and then sitting in on while the lawyer prepared their wills. Oh yes, I did talk to a lawyer once and he sent me home with some homework. We struggled with it!
In Canada, if there is no Will, the estate assets are frozen and the court winds up the deceased's affairs and pays off his or her debts. The remaining estate is divided according to a rigid set of rules which is not automatically all to the surviving spouse and can include children. I recall reading some place that the children's share might be placed in a trust and not accessible for some time. Please do not take my word for it and do your own research.
To avoid that, or to actually dispose of your estate the way you want it, a Will is important. Also, because of the rules and our typical lack of knowledge on the topic, it is best to consult a lawyer. Getting a Will written is usually not very expensive; few hundred bucks is what I hear. Of course you will want to check your Will yearly and decide if you want to make any changes.
In an initial appointment with a lawyer (who we never used in the end), the lawyer said he needed two key pieces of information:
To help your executor, it is a good idea to keep a complete set of up-to-date net worth statement and other important details in a safety deposit box or at home. I am thinking a good idea is to keep it in a safety deposit box and then tell the executor/lawyer where the safety deposit box? I would put the names of all the banks and institutions where I have assets, probably would not put the numbers in there if keeping it at home? With so many online only banks, there is certainly a possibility that the executor might think they are done with your estate only to find out at some later time that you had an online account with a million dollars sitting in it!
It is common that when you are drawing up your Will you also draw up a Power of Attorney in case you are incapacitated and cannot make medical/financial decisions. I recall that each of my parents actually got three documents done; Will, POA for Money, POA for medical decisions. I believe the total bill was a bit over one thousand dollars.
Honestly, I never thought I needed Life Insurance. Maybe it is because having grown up in Pakistan as a kid where such financial instruments, though available, are/were not popular. The Wealthy Barber book convinced me that everyone who needs Life Insurance should have it. The fact that was enlightening (though not a surprise, I just never thought of it), is knowing who needs life insurance. You only need life insurance if you have dependents which could include spouse, children and parents. In other words, a single person, who no one is financially dependent on, does not need life insurance.
The following equation summarizes well why you need life insurance:
estate + life insurance = debt + funeral expenses + wishes
In other words, the combination of your estate and the life insurance payout should cover all your debts, funeral expenses and your "wishes" which I describe below. One important thing to note is that as your financial wealth (estate) increases, your insurance requirements will decrease. Because of this, it is important to regularly revisit your life insurance policy to not be over-insured. At some point in your life, you will likely reach the milestone where you no longer have dependents or that you have an estate big enough, that you no longer need life insurance.
To determine how much life insurance one needs, one needs to identify all their dependents and what are the needs of these dependents and for how long. Here are some typical questions to ask yourself:
Of course, do not forget to account for inflation for money that will be needed over a period of years.
The Wealthy Barber brought up an interesting point regarding life insurance for spouses who do not bring money to the table (e.g. think a house wife). Many would think that since the spouse does not contrubute financially by bringing cash in, there is no need for a life insurance. The book mentions a number of reasons why this line of reasoning is flawed. If the spouse stays at home to take care of young children, who is going to take care of them if the surviving spouse must go to work? Will a nanny be hired? Will the children be sent to a daycare? This will likely cost money. Where will this money come from? All the other things around the house that were taken for granted because the spouse did them while they were home. Who is going to take care of them? Will external help be engaged? What would it cost?
Another interesting point in the book was the scenario where both spouses make very good money and think they would manage fine if something happened to one of them. What happens if something happens to both of them and they had dependents, children? The Will takes care of guardianship but whatabout financial security?
The Wealthy Barber goes into a lot of details about different types of insurances; Term vs. cash insurance. Since the book is geared to American readers, I am unsure whether the same applies to Canada. In the US, term insurance is sold in fixed year chunks, 1, 3, 5 etc. The contract of the insurance states that if you die the beneficiary gets the stated amount. When the term expires, so does the insurance. So it is very much like fire insurance. If you did not need to use it, the amount you paid is gone. The second type of insurance (again in the US) is cash insurance which is term insurance but with a savings component. The idea being that if you do not end up using the life insurance, i.e., you did not die, the savings component is what you get whenever you cancel the policy. However, if the insurance is activated, due to your death, the beneficiary gets the term amount. Notice that with this insurance, its an either or situation; either the company pays the term or it pays the cash. In the US, aparently there is now another type of insurance called universal life, which makes the beneficiary eligible for both the term component and the savings component.
Term insurance is obviously cheaper so a recommendation is to buy just term insurance and then yourself save the difference between the cost of the term and cash insurance into a separate account. You are likely going to get better returns by managing this separate savings. The last word on this; it is recommended to get renewable and convertible term insurance. The renewable means that at the expiration of the stated term, you can renew without having to prove insurability again. Convertible means to be able to convert a term insurance into a cash-value insurance, important if you go past 65 and can no longer renew your term insurance. I am not going to spend more time on US insurance policies as that might not be applicable to Canadians.
Unfortunately, I have nothing else to add here since I am not aware of Canadian specific products. My TODO here is certainly to find out more about Canadian life insurance.