Great Question! How Much Life Insurance Is Enough?
The question of how much life insurance you need has been around for as long as life insurance has. There really is no standard answer - though some say otherwise - because every person is different in their wishes, levels of risk, and family requirements. Your Financial Planner will be able to assist you with determining the amount of coverage you need.
I have seen quick calculations like 5X your annual salary or total debt X2 and various other assessments. The only way to determine your real needs starts by having ”the talk”. This talk can be uncomfortable and sometimes emotional but it is a very important part of the financial planning process.
First let’s imagine for a minute that “it” happened. Nobody likes to talk about death but that’s really what this is about. Let’s just get past the uncomfortable part and imagine that someone died. Let’s also say that it was quick & peaceful so that we don’t need to think about it and discuss how we will move forward.
What do the survivors need? How much income needs to be supplied to replace the income from the deceased. How long does that income need to last? This will be different for every family since their needs will vary. Some families may need to have funds available for child care while others may not. Some families may have the ability to supplement the deceased’s income and some may not.
Discussing this amongst your family ahead of time will really help your Financial Planner so that a solid plan can be developed.
Ask yourself these questions:
How much money do you need for final expenses (funeral, taxes etc.)?
How much debt do you want to have paid off?
How much money do you want to set aside for specific items (Children’s education, emergency fund etc.)?
How much Income do you want the surviving family members to have access to?
For how many years do you want that income to last?
Would there be a financial hardship left to the survivors if inadequate coverage was in place?
Meet the Smiths
Bill and Marcia Smith are ready to get a life insurance plan established for their family. Bill (37) works for a Software development company and earns $74,000/year. Marcia (35) works part time for an Electrical Contractor and earns $48,000/year.
They have two children, Carter (8) & Olivia (6). Both children are now in elementary school.
They have a home that is worth $510,000 with a remaining mortgage of $325,000. They owe $24,000 on a car loan and have no other debt.
Bill has an RRSP account worth $42,000 and Marcia has an RRSP account worth $21,000. Bill also has an RESP account set up for the 2 children that they are contributing to regularly, the current balance is $5,500.
After having “The Talk”, we discovered that the family wants to have the following items addressed if either were to die:
$20,000 of cash immediately for final expenses
$30,000 put into an Education fund for each child (adjusted for inflation).
$10,000 in an emergency fund.
Pay off all debt
With the above items looked after (no debt, children’s education looked after), they believe that the family would require $80,000 of income to maintain their current lifestyle. They would like to have this level of income until Olivia has completed her post-secondary education.
The attached Life Insurance needs analysis was developed and it was determined that their life insurance needs are:
Current Life Insurance Coverage
Bill and Marcia currently have some life insurance in place already:
Bill has 2 Times his annual income through his employer’s benefits package and he also has a small Permanent plan that his mother purchased for him as a child. This policy has grown from $5,000 of coverage and now has $16,500 of coverage.
Marcia has $25,000 through her company’s benefits plan.
The Canada Pension Plan also has a death benefit of $2,500 which they are both eligible for.
Recommended Life Insurance Coverage - AKA “The Plan”
Bill and Marcia implemented the following insurance plan:
20 Year Term plan covering Bill for $750,000
20 Year Term plan covering Marcia for $630,000
The plan also provides a benefit of $50,000 in the event that one of them is diagnosed with a critical illness (i.e. heart attack, cancer or stroke).
The total cost for the plan is $139/month and the Smiths and very relieved to know that they have sufficient coverage to protect their family.
If their budget was a bit tighter they could get a lower cost 10 year term covering life insurance only for as low as $60/month. A good planner will be able to show you the options and advantages of each type of insurance.
Do You Have Enough Life Insurance Coverage?
As you can see from the example above, it really is a personal matter that will vary based on everyone’s circumstances. We often hear people tell us “I have coverage through work” without regard for the amount of coverage or the possibility of losing that employment.
Mortgage coverage may be an option to pay off your mortgage, but will it take care of your other needs? Provide replacement income? Will it be as cost-effective and fair as term coverage?
When it comes to your family’s needs don’t leave it to chance. Talk to a Certified Financial Planner today and get a life insurance needs analysis done so you can decide for yourself. If you’d like, First Foundation would be honoured to consult with you on this. Give us a call.
To your health and wellbeing!