“How much life insurance do I need?” That’s a question you may be asking yourself once you realize that you may need life insurance. Life insurance is a must when your family is financially dependent on you to cover housing expenses, debts, and general living. But what is the amount of life insurance you need to guarantee the well-being of your loved ones?
In 2014 a BMO Insurance study found 74 % of Canadians have life insurance, but 70 % are not confident their life insurance policies can provide sufficient money for their families when their loved ones die.
There is an ideal point between:
- The right type of policy to suit your circumstances
- A sufficient amount of coverage to meet your beneficiaries’ financial needs
- Affordable premiums
In this article, we’ll answer the following questions:
Do I need it?
What type of policy should I take out?
How much life insurance do I really need?
Who Needs Life Insurance?
Purchasing life insurance is one of the most reliable ways to protect our loved ones, but it’s not necessary for everyone.
For example, if you have no dependents and have enough money to cover your debts and final expenses – your funeral, estate, attorney’s fees, and other expenses – you may not need it. The same applies if you have a family, but you have enough financial assets to maintain their lifestyle without setbacks should you pass away.
On the other hand, life insurance can provide an invaluable windfall if:
- You are the primary provider for your family
- Your family wouldn’t be able to sustain their quality of life without your income
- You have more debt than your assets
- Have young children who are financially dependant In the event of a life insurance payout, your beneficiaries can have a lump sum that can go towards the things they need: paying outstanding debts, cost of living expenses, and maintaining their financial stability if you pass away.
At TermLife Insurance, we believe that life insurance is not one-size-fits-all. After all, our lives are unique, and our own individual needs differ as well. So why should our coverage be the same?
With that reasoning, depending on your needs a 10, 20, or 30-year policy may be your best option. There is also the possibility of adding riders to your policy, such as disability or critical illness. For this reason, it is crucial to talk to an advisor to customize your coverage.
Tips For Calculating How Much Life Insurance You Need
Think about life insurance as part of your overall financial plan; along with savings and investments, insurance should be the third cornerstone to holistic financial planning.
Consider the expenses that will continue to occur over time: Living expenses, the cost of retirement and long-term care for seniors, education costs for children. Not to mention inflation. The cushion that life insurance provides helps ensure that your loved ones are able to maintain their lifestyle even after you pass.
A simpler approach for finding income replacement value is achieved with the following formula:
Insurance coverage = actual monthly income x remaining retirement years
Although the reality is that this is not the best way to resolve how much coverage is needed.
Another Way To Calculate Your Insurance Coverage Needs: 10 X Your Salary
Many insurance experts suggest that when it comes to buying a life insurance policy, you should buy coverage that is approximately 10 times your yearly net income. For example, if you make $60,000 a year, you should want $600,000 in life insurance coverage. ($60,000 x 10= $600,000) While this is one way to calculate the coverage estimate, it does not take into account other factors such as your existing savings or debt.
Calculate How Much Life Insurance You Need With The DIME Method
Many experts use the DIME method to calculate the life insurance coverage needed. DIME is an acronym that stands for Debts, Income, Mortgages, and Education expenses.
- Debt: includes debts that cannot be forgiven in the event of death, such as credit cards or student loan debts. These expenses should also include the insured’s final costs.
- Income: individuals purchasing life insurance must determine how much their annual income is and how many years of income replacement are necessary to support their loved ones. For example, if the spouse and children depended on the insured’s $60,000 annual income for 15 more years, $900,000 of coverage would be needed.
- Mortgage. The mortgage balance must be considered and added to the amount of protection purchased.
Education. Add a portion that includes tuition fees for all the children in the college that are coming.
By adding all these elements together, you will be able to calculate the amount needed to meet all financial obligations after an untimely death.
What Is the Minimum Amount of Life Insurance You Need?
Is it truly possible to quantify the loss of value when someone dies? No, but it is possible to at least provide a realistic windfall cushion to replace lost income and provide for the future needs of your loved ones.
It is hard to decide what the value is when you die. As such, the maximum coverage required is different for everyone. Below are the key factors that should be considered while buying minimum life insurance.
One of the main reasons for taking out a life insurance policy is to replace potential lost income in the event of death. For example, If you provide all the income for your dependents, you will require a policy payout large enough to replace your income and provide a little extra for inflation.
There are other people in your life who are important to you, and you may wonder if you should insure them. Generally, you should insure people whose death would mean a financial loss to you. The death of a child, while obviously emotionally devastating, does not constitute a financial loss because children typically don’t earn significant income. The loss of an income-earning spouse, on the other hand, can be both financially and emotionally devastating.
However, breadwinners aren’t the only ones who should be insured. Even the death of a homemaker can result in significant increased family expenses such as childcare, at-home healthcare, and/or home upkeep, and the like.
In the case of a partner or spouse, use the income replacement calculation with his or her income (or what you’d otherwise pay a third party in the case of homemakers). You can do the same with business partners with whom you share a financial relationship. For example, you might share mortgage payments on a property you own together. It may make sense for you to consider a policy for that person, as their death would impact on your financial situation.
Life insurance should cover the payment of all your debts, such as student loans, mortgages, credit card payments, or personal loans. For example, if you have $250,000 in debt on your mortgage and a $5,000 loan on your car. You need at least $255,000 on your policy to cover your outstanding debts.
It’s also important to factor in future costs as well: additional fees or interest accrued, future tuition costs if you have young children or plan on going back to school, etc.
Life Insurance Needs Example
Typically, insurance companies recommend six to ten times the amount of an individual’s annual salary for life insurance. You can also calculate the amount needed by multiplying your annual salary by the number of years left before retirement.
So, in order to calculate the coverage for a 40-year-old earning $50,000 per year, you have to multiply 25 years X $25,000, resulting in $625,000 in life insurance.
The standard-of-living approach depends on the sum of money needed for the survivors’ standard of life should the insured die. You take that amount and multiply it by 20. The idea is that survivors can withdraw 5% of the death benefit each year, i.e., the standard-of-living amount, while investing the death benefit principal and earning 5% or more.
Calculate The Amount Of Coverage You Need With Our Life Insurance Calculator
Using a simple tool like our term life insurance calculator, you can easily determine coverage amounts without having to perform any complex calculations.
The calculator will ask you for certain information such as Immediate Cash Needs, Ongoing Income Needs, and Current Assets to calculate the coverage you need to meet your cash and income needs.
How Term Life Insurance Can Help You Protect Your Loved Ones
If you want life insurance, you should have a general idea of your family’s financial situation and what it should look like down the road. All these things will affect the amount of life insurance you get and will be helpful for a licensed advisor to know.
At Term Life Insurance, we specialize in affordable coverage that works for our customers; not the other way around. Our dedicated licensed advisors work closely with our clients to offer options that are right for their unique needs and budget. If you would like to know how much insurance coverage would be ideal for you, we are more than happy to work with you to determine the right policy for you and your family.
We offer plans in three reliable terms: 10, 20, and 30 years. All our term plans provide a maximum benefit amount of $1,000,000, and you are not required to undergo medical testing to be covered.
The entire process is done over the phone; no need to make an appointment to meet with an agent. To begin the process, all you need to do is fill out our online application form.
One of our advisors will contact you and provide you with a range of coverage options and free, no-obligation quotes as soon as your form is submitted.
At Term Life Insurance, we are prepared to offer you the ideal coverage to safeguard the financial integrity of your loved ones in the event of your death.