Purchasing life insurance can often be a difficult thing for many to do. Not only do you have to think about what would happen if you were to die, but you also have to think about how much money your family would need if you did. Life insurance policies are practical; they do only one thing: they allow your family to maintain their standard of living if they were to lose your income through death. This simple premise makes it relatively easy to calculate how much life insurance you need. While many experts say that your policy should cover 7 to 10 times your annual income, your life insurance policy should be a lot more individualized. Below are the things you and your policy advisor should take into consideration when calculating how much life insurance you need.
- Costs at death
The first thing you want your life insurance to cover is your costs at death. This includes funeral costs, estate expenses, and other costs like medical expenses or lawyer fees.
- Debts and Expenses
You also want your life insurance to pay off your debts and expenses so that those costs don’t land on your loved ones’ shoulders. These are things like paying off your mortgage, car payment, student debts, credit cards debts, and any other expenses you may have.
You want to leave your family comfortable. Usually, parents want to cover their children’s education costs. This number is usually $15 000 per year of study per child, or $50 000 per child, which is the maximum amount you can put in an individual RESP. If there is anything else you want to leave behind for your family, you want to calculate that into your needs.
- Emergency Fund
You often want to provide your family with an emergency fund of savings (3 to 6 months’ salary). This will help your family if some other unforeseen event occurs.
Long Term Costs
- Living Expenses
When buying your policy, you need to determine how much of your income your family will need in order to continue in their current standard of living, including daily expenses and savings. This is usually 60% to 80% of your income.
- Years of Need
You also want to calculate how long your family will need this income. This is usually determined by how many years away you are from retirement, or how many years it will be until your youngest child is financially independent.
Assets and Insurance
You should also take into consideration what assets you have that will help your family when you pass. If you have assets that your family might sell, like your home, a property, a business, or a vehicle, you should consider taking this value out of the total amount of coverage you might need.
Similarly, if you have any savings or investments that may be paid out to your family upon your death, things like bank accounts, TFSAs, mutual funds, certificates of deposit, stocks, bonds and cash, these should not be included in the total amount of coverage you need.
- Other existing policies
If you have another life insurance policy, for example a group or employment policy, then that amount should also be subtracted from your total needs.
Your insurance broker will sit with you and go through a questionnaire and analysis of your needs to determine exactly what policy is best for you and how much coverage your family will need in the event of your death. While considering life insurance is difficult, it is something you should do to protect your family. If you’re not sure if you need to buy life insurance, see our blog or call us for a consultation.