What happens to my policy if I lose my job?

How it works

three mechanics, one of them fatal

How wealth actually crosses a generation

1. 01What passes outside the estate by designation
2. 02The deemed disposition that taxes almost everything else
3. 03Whether the estate holds cash to pay that tax
4. 04Selling assets to pay the tax is the common failure

The contract does not know about the job. It knows about a due date, a window after it, and a provision that may draw on accumulated value if nothing arrives. That sequence runs automatically, in the same way for a household that chose to pause and one that had no choice.

The sequence is identical to any other missed payment, run entirely by the insurer's own administration regardless of why the household stopped paying. A due date passes, the insurer's system opens a grace period of a length set out in the contract, and if nothing arrives by the end of it, a contract that carries a provision for it draws automatically on its own accumulated value to cover the premium. Nobody at the insurer asks why the payment did not arrive, and nobody there distinguishes a household coping with a layoff from one that simply forgot, since the wording that runs the sequence draws no such distinction. Separately, if group coverage came through the employer, that coverage is administered by an entirely different insurer under an entirely different contract, one that commonly ends on its own schedule tied to the last day of employment and not to any grace period at all. That employer's own human resources office, not the insurer holding the individual contract, is the party administering that separate coverage, and the two files are never linked or cross referenced by either insurer.

The cost or the catch

two layers, both payable

What a wealth manager charges

1. Mainly a share of the assets under management
2. Hourly, flat fee and retainer structures also exist
3. Funds held carry a management expense ratio of their own
4. The two layers are separate and both are payable

The cost is that the automatic route is the most expensive of the routes available, because interest runs on the amount advanced and compounds. It is also the only one that requires nobody to act, which is why it is the one most households end up on. Knowing how many payments the value can absorb is the With that settled, the next question follows. number to have. A parallel question for that same period, since a TFSA and an RRSP behave differently once money comes out, is addressed in should I use my TFSA or RRSP first.

The bad news is that the automatic route, while the least demanding, is also the one that erodes value fastest at exactly the moment a household can least afford it. Interest accrues on every advanced payment and compounds, so a job loss that stretches over many months can consume value far faster than the same number of months of ordinary aging would have. A contract in its early years can hold so little accumulated value that this route is not even available, in which case the grace period ending is the end of coverage outright, with nothing standing behind it at all. Neither outcome announces itself in advance on the household's own paperwork; both are discovered by asking or by waiting for a letter. The household that asks is the household that keeps a choice, and the household that waits is the household the sequence decides for.

What changes how long a contract can cover a gap in income?

How much value a contract has accumulated by the time income stops matters more than any other single factor, and that value differs enormously by how long the contract has been funded and how it was designed from the start. The insurer's own rate for advancing a premium against accumulated value differs between companies and compounds according to that insurer's own contract wording, and whether the contract carries a waiver of premium rider, and whether the reason for the gap in income is a qualifying disability and not a layoff, changes the entire analysis, since an admitted claim under that rider can have the insurer meet the premium instead of drawing down the household's own value. And whether any optional deposits, and not the contractual premium itself, were being made before the gap changes what can safely be stopped without consequence and what cannot, since an optional deposit can usually be paused without threatening the base contract at all, while the base premium itself carries no such built in flexibility whatsoever.

What should be asked, and of whom, as soon as income stops?

the discipline, not the product

What a household actually does differently

1. 01A capital purchase arrives, a vehicle or a renovation
2. 02The advance is taken against the contract instead
3. 03A repayment schedule the household sets and keeps
4. 04Repayment continues after the debt would have ended
5. 05The money is not free, and interest accrues to the insurer

The insurer is the source for the date the next payment is due, the exact number of days in the grace period, and whether the contract will advance the payment automatically and at what rate, all of it requested in writing and not assumed from memory of the original paperwork. The same insurer can state how many payments the current accumulated value could realistically cover before the contract itself is at risk, a number worth having as soon as possible and not discovered payment by payment. An accountant is the person to ask what ending the contract, if it comes to that, would add to income in a year that may already look very different from a typical one. None of these three answers, the grace period, the automatic advance rate and the number of payments the value could absorb, are printed together on a single form the household already has, which is exactly why requesting all three in one call or one letter saves a household from three separate rounds of waiting.

Who does a job loss affect most on an existing contract, and who does it barely touch?

and what it ends

What a surrender actually pays

1. 01The accumulated cash valueWhat the contract holds.
2. 02Less any surrender chargeProvided by the contract.
3. 03Less anything outstandingOn an advance, with the interest on it.
4. 04What reaches youAny amount above the adjusted cost basis is taxable.

It affects most a household whose contract is still young and holds little accumulated value, since the automatic route may simply not be available to it at all. It affects a household relying on group coverage through the employer just as directly, since that coverage very often ends with the job regardless of what happens to any separate individually owned contract. It barely touches a household that has built substantial value over many years and that can absorb a gap of many months on the automatic route without coming close to exhausting it, though even that household is better off knowing the number and not assuming it. And it barely touches a household with savings set aside specifically for an income gap, since that household has an alternative to the automatic route that a household without such savings does not.

What this page will not tell you

This page does not say how many payments a specific contract's value could cover, since that number depends on figures only the insurer holds. It does not say whether stopping payments is the right decision for a specific household facing a specific gap in income, a judgment that belongs to whoever reviews the whole household's finances rather than one contract in isolation. And it does not calculate what an ending would add to income this year, a figure for an accountant working from the real numbers on file. What it will say plainly is that the automatic route exists to buy time, not to solve the underlying gap in income, and treating the two as the very same thing is where most of the real damage described above actually comes from in practice. Nobody can answer this one for you.