How to Decide How Much Life Insurance You Need
This is a great question when money is tight but debt is increasing. The credit monitoring agency Transunion reported that non-mortgage debt will hit an average of almost $29,000 this year.
So, how much life insurance do you really need to protect your family? First, the purpose of life insurance is to provide your loved ones with a cheque that will maintain their lifestyle for as long as you decide is reasonable.
If you are single, it might just be to provide your parents with a return of what they spent on your education but for some, it might be much more. One young man wanted $1 million as he said that his parents had nothing and would depend on him. He was young and the insurance was cheap.
Most couples need to ask each other the question, “How much money would you need to live on if I was not here?” That is the question I always ask.
To find the answer, calculate the money that is needed to:
- Pay for final expenses.
- Pay off the mortgage.
- Pay off all non-mortgage debt (e.g., car loans, lease payments, credit cards, etc.).
- Provide an education fund for children.
- Maintain your lifestyle for however many years you decide. Here, subtract any assets you have that can be used immediately. Do not include RRSP’s as that is for retirement and from a tax perspective can be expensive to access. However, if you have a second property, you might include its sale and the income from that sale.
For #5, you will need to make assumptions on the returns your investments will make (4% in today’s environment is conservative) and the inflation rate (2% is reasonable now). Generally, have a difference of 2% between these two assumptions. So, if you choose a return of 5%, then assume inflation at 3%. Remember, the mortgage will be paid off so you can exclude mortgage payments from this calculation.
Go through the calculation for all insurable parties individually, as seldom are their insurance needs the same. Once you have the answers to these questions, you can click here for a simple calculator that will calculate how much life insurance you each require.
Once you have this figure, go here to find out what it will cost. A life insurance agent can confirm your assumptions and also save you some money through various discounts.
The most important decision you make is not to procrastinate. Acting fast is not just about obtaining a policy before you die, but also before you incur medical issues that will negatively affect your chances of getting life insurance at a decent price.
Equally important and one of my passions is protecting your income. I always have a conversation regarding disability insurance or critical illness insurance. It is far more likely that one of the bread winners will suffer a disability that threatens family income and long-term family finances than dies.