4.3 Ongoing Income Replacement, Education Funding, Charitable Legacies, and Coverage Shortfall
Key Takeaways
- After Anika's 1.1 decision to clear the Edmonton mortgage, HELOC, and car, the remaining Edmonton income gap if Tomasz dies is about $26,240 a year; an 18-year liquidation fund at 1% real after-tax is about $430,000.
- Nadia's Ontario order still requires $200,000 of life insurance; capitalizing remaining support at 1% is only about $121,000, so the order — not the minimum PV — is the need you record.
- Education and legacy capital stays at $80,000 and the Heart & Stroke gift at $25,000; the $31,000 RESP is an earmarked resource, not a reason to drop education from the needs column.
- Resources that actually pay are group $142,000, $150,000 of term for Anika, $100,000 of term for Nadia, DC lump sum $188,000, CPP death benefit $2,500, RESP $31,000, and joint cash $28,000 — $641,500 — for a shortfall of about $689,000.
- Available cash flow, not the shortfall alone, decides whether the family can fund new premium; a $689,000 time-limited need and a $900 monthly budget gap are different questions.
Quick Answer: Ongoing personal needs are the income survivors still cannot meet after debts you chose to prepay, plus funded education or legacy amounts and charitable bequests. Subtract only existing individual, group, government, and earmarked assets that will actually arrive. The residual is the coverage shortfall. Then test whether cash flow can pay for additional coverage.
Section 4.1 produced two similar headline numbers for Tomasz (human capital $1,326,000, capital needs $1,330,400). Section 4.2 turned funeral, administration, tax, emergency cash, and debt into near-term lumps. This section adds the multi-year pieces, nets current coverage, and asks whether the household can pay for the residual.
Income replacement years (Edmonton household)
If Tomasz dies and Anika's working assumption holds — Edmonton mortgage, HELOC, and car gone — those payments leave the budget. Support of $2,200 a month to Nadia and Marek also stops as an Edmonton outflow (Nadia's need does not disappear; it moves to her own capital line). Chapter 2's $15,400 monthly burn then falls by about $5,530, to about $9,870. Add a modest $500 a month of extra paid help because the second adult in Irena's and Sofia's care roster is gone. Survivor spend ≈ $10,370 a month, or about $124,440 a year.
Anika still brings net $85,000. Mississauga net rent $8,400 continues if the condo is kept. Child support received for Leila is $4,800. Incoming cash ≈ $98,200. The annual gap is:
$124,440 − $98,200 = $26,240.
How many years? Sofia is 4. Funding until she is 22 is 18 years of heavy dependency (Leila is 12 and Marek is 16, so the expensive years are front-loaded). Irena's care may last a different period; the extra $500 is already in the annual gap rather than a second 30-year annuity. Use n = 18 at the same 1% real after-tax rate as section 4.1:
PV = $26,240 × [1 − (1.01)^(−18)] / 0.01 ≈ $430,000 (liquidation).
If the representative had not prepaid the Edmonton mortgage, the gap would still include $34,200 a year of housing payments and the income fund would jump. Do not capitalize the mortgage and pay it off.
Capital retention on the same $26,240 at 3.5% after-tax nominal is $26,240 / 0.035 ≈ $750,000. That is why a quiz stem that says “leave the principal intact” produces a larger face amount than “spend the fund down over 18 years.”
CPP survivor and children's benefits. Anika, under 65, may receive a CPP survivor's pension (flat-rate portion plus 37.5% of Tomasz's retirement pension determined as if he were 65 at death). Qualifying children may receive a children's benefit. Those amounts are resources, they are often taxable or income-tested, and they are not a 20-year mortgage. This worksheet's base case leaves them at $0 until a Service Canada estimate is in the file — a conservative overstatement of the income fund. A documented $6,000 a year would reduce the 18-year fund by about $98,000. OAS Allowance for the Survivor does not apply until Anika is 60 and income-tested. Workers' compensation is only a line if death is work-related.
Nadia's household is a second income need
Human capital already folded support into Tomasz's $73,500. Capital needs must not forget Nadia just because she is not in the Edmonton kitchen. Remaining spousal support is $800 × 12 × 6 ≈ $57,600 undiscounted ($55,600 at 1%). Remaining child support if Marek needs four more years is $1,400 × 12 × 4 = $67,200 undiscounted ($65,600 at 1%). Capitalized support ≈ $121,200, taught as about $121,000.
The Ontario order, however, requires $200,000 of life insurance with Nadia irrevocable. Record $200,000 as the need. The $121,000 present value explains why a court picked a round insurance number; it does not let you override the order with a homemade annuity.
Education funding and charitable legacies
Setting up education or legacy funds is on CISRO's capital-expense list. The 1.1 file still wants about $80,000 of capital for Marek's remaining Ontario schooling plus Leila and Sofia. The RESP holds $31,000. Keep $80,000 in the needs column and subtract the RESP as an earmarked resource. Cancelling the education line because “there is an RESP” underinsures if the RESP is too small. Spending the RESP on the funeral is the opposite error: it is restricted education money.
A legacy can also mean Irena's care if Anika will not house her mother-in-law indefinitely. This worksheet keeps Irena inside the Edmonton income gap (PSW is already in the budget) rather than adding a second six-figure care annuity that Chapter 2 did not inventory. If the client states a separate care capital amount, add it; do not invent it.
Charitable donations: Tomasz wants $25,000 to Heart & Stroke. That is a death-triggered capital amount once he states it. A direct insurance designation to the registered charity and a gift in the will do not have identical effects on the terminal return (a donation tax credit can reduce tax on the failed-rollover path). 1.3 records the $25,000 need. Implementation (which contract, which designation) comes later. Do not treat the gift as free just because it may create a credit.
Current coverage assessment and the shortfall
Subtract dollars that will actually be paid to the person who has that need.
| Gross capital need (Tomasz dies) | Amount |
|---|---|
| Immediate cash (funeral, admin, tax, emergency) | $83,000 |
| Debts to clear | $512,400 |
| Income-replacement fund (18 years, liquidation) | $430,000 |
| Nadia — court-ordered insurance | $200,000 |
| Education / legacy | $80,000 |
| Charitable gift | $25,000 |
| Gross | $1,330,400 |
| Resource (only if the designation matches) | Amount | Whose need it serves |
|---|---|---|
| Group life (manufacturer, 1× salary) | $142,000 | Anika's household, and only while he is in the class |
| 2019 term — Anika's share | $150,000 | Anika |
| 2019 term — Nadia's irrevocable share | $100,000 | Nadia, not Anika |
| DC pension lump sum | $188,000 | Named beneficiary — confirm Anika |
| CPP death benefit (basic; top-up does not apply) | $2,500 | Estate or eligible applicant; taxable |
| RESP (education only) | $31,000 | Education line |
| Joint cash | $28,000 | Immediate cash; already netted in 4.2's story |
| Resources counted here | $641,500 |
Coverage shortfall ≈ $1,330,400 − $641,500 = $688,900, taught as about $689,000 of new coverage on Tomasz's life.
Split by household, so you do not let Anika's shortfall steal Nadia's policy: Anika's need block is $1,130,400 against $541,500 of her resources ($589,000 short). Nadia needs the remaining $100,000 to reach the $200,000 order. Those two numbers add to the same $689,000.
Anika's own death is a separate worksheet: human capital about $1,202,000, group life $236,000, no individual policy, and a replacement-care shock (PSW and after-school) that Tomasz cannot absorb beside a $142,000 job. Do not leave her life unanalysed because his T4 is larger.
Available cash flow to pay for additional coverage
CISRO lists available cash flow to pay for additional coverage beside the shortfall on purpose. A $689,000 need the household cannot premium-fund is not a finished 1.3 file.
Chapter 2's monthly net was about $16,300 against expenses of about $15,400, a $900 gap that already includes RESP and RRSP deposits inside the lifestyle block. New premium competes with those deposits, with Tomasz's aviation extra-premium risk (underwriting comes later), and with the fact that group optional life was declined.
Suitability implications you can already state without choosing a product:
- The $689,000 is mostly time-limited (mortgage years, children, Nadia's remaining term). That duration label points later toward term for the bulk, not toward participating whole life for every dollar.
- The $25,000 charity (and any lifetime Irena care you later split out) is permanent in the 1.3 sense.
- If cash flow can support only a fraction of the premium a permanent illustration would demand for $689,000, the honest 1.3 output is a smaller permanent amount plus term for the expiring block, or a retained residual risk the clients accept in writing — not a silent rounding-up to a product they will lapse.
Revisit the number when Tomasz's T4 moves toward $160,000 or toward $0. That is section 4.4.
After building the Tomasz capital-needs total of about $1,330,400, the representative subtracts group life of $142,000, $150,000 of individual term payable to Anika, $100,000 of term payable to Nadia, the $188,000 DC lump sum, the $2,500 CPP death benefit, the $31,000 RESP, and $28,000 of joint cash. What is that subtraction called, and what is the residual?
Which statement about education funding and charitable legacies in this personal needs analysis is correct?
The Tomasz shortfall is about $689,000. The household's monthly surplus in the 1.1 budget is about $900, and that surplus already competes with RESP and RRSP deposits. What is the suitability implication inside sub-component 1.3?