How Much Life Insurance Do I Need?

Now that you’re ready to buy life insurance, many people ask “How much life insurance
do I need?” One important question to answer is how
much money your family will need if you die. Everyone’s financial picture
and priorities are different, but there are a few simple steps that
can help you get started to identify a coverage amount to meet your needs. Start by thinking how
much money your loved ones will need if you were suddenly gone and could no
longer provide for them. Financial needs often fall into one of
three categories. How much money will they need right away
to pay for things such as funeral costs, Legal and Estate fees, and any outstanding loans, credit card debt and even the mortgage.
You will also need to determine how much your loved ones may need to
help pay for everyday expenses for a period of time to help offset the loss
of your income. A simple way to estimate income
replacement is to multiply your annual salary by the number of years you
think your family will need ongoing financial support. If you have young children, you will
need to plan for additional childcare expenses that may occur and determine if you want to pre-fund
future education expenses such as university or college tuition. Next, summarize all the resources that are
currently in place to help your family meet their financial needs. This may include your spouse’s
income, savings, investments or rental income and finally,
other life insurance policies. The difference between your family’s
financial needs and the existing sources of income
in place to meet those needs will help you determine the amount for
additional life insurance coverage. Let’s take a look at a typical Canadian
example. Meet Jane.
She is 30 years old, does not smoke, is married and has two kids still attending
grade school. For the family’s immediate needs, let’s
use the average new mortgage balance of $250,000, the average household debt of $27,000, and the average funeral cost of $8,000. For ongoing needs, Jane determined her
family would need her income replaced for 7 years, and her salary matches the
Canadian average $48,000 per year.
Jane would like to ensure university education is funded for children with an average
cost up to $10,100 per year without residence, this would result in costs
of approximately $61,000 for two children. The total need that
Jane has identified for her family is $682,000. Step 2 is to determine available sources of income. Jane has a group life insurance policy through
her employer which is two times her salary… …and let’s say Jane has $4,000 in savings… …for total sources of income available of $100,000. Step 3 is to calculate the difference. By subtracting the existing sources of
income from the total needs identified, we determine that Jane’s life insurance need is $582,000. While $582,000 may seem like a large number at first glance, Empire Life offers many affordable solutions
for this amount of coverage. Jane was happy to learn that for only $21.16/month (based on age, health and lifestyle)
she could purchase $582,000 of 10 year term life insurance
to meet the needs of her loved ones in case the unexpected occurs. Life insurance is an essential part of a sound
financial plan, and a financial advisor can help you identify your needs and provide
solutions that best meet these needs. Speak to an Advisor today.

Leave a Reply