How Much Insurance?
There’s no product in the financial world that’s been more maligned than life insurance. Part of the problem has been the heated and often vicious debate that’s raged between the proponents of term insurance versus those who favour permanent insurance. The other part of the problem is that people have been “sold” insurance – as opposed to making an informed buying decision – and that’s left a really bad taste in our mouths.
Some people believe if they don’t work outside the home they don’t need life insurance. With no paycheque to replace, premiums seem like a waste of money. So, answer me this: with the other guy at work all day, who will watch the kids, do the laundry, drive hither and yon, make dinner, do the laundry, vacuum, grocery shop, do the laundry? How much would it cost to replace you?
Young people know they are never going to die. And if they do, it’s a long way off. Since the odds are in their favour, life insurance premiums are a waste of money. This is a paradox since if you buy your life insurance when you are young, you’ll pay so much less for it. Let’s be reasonable here, don’t you think a life of peace of mind is worth a few hundred bucks a year? Course, if you’re a gambler by nature and choose to take your chances skipping life insurance completely I only have one more question for you: how come your stuff is worthy of insurance, but your life isn’t? Maybe it’s because YOU don’t have to deal with the ramifications of your own death so it’s easy to ignore them.
Since many people are covered by life insurance through their benefits package at work, they believe that individual insurance is a waste of money. Have you even reviewed how much your work insurance provides and calculated whether this is enough to support your family? And when you leave that job for the next, will you still be young and healthy enough to get the insurance you need because the work plan just doesn’t cut it?
Then there are also people who avoid buying life insurance because they simply don’t want to think about their own demise. Ya know what? You’re gonna die. So get over yourself and do what it takes to make sure your family isn’t left holding a Pot of Nothing when you’re safely pushing up daisies.
Almost everyone needs life insurance. Unless you plan to lead a solitary life and have no one that depends on you, you’ll probably need insurance at some point. So the next question is, “How Much?” Here’s a formula you can use to figure this out:
A – (B + C + D + E) = Insurance needed
A = Your family’s Assets & income (Including existing insurance, a spouse’s income, government benefits, pension income, income from investments [e.g., GICs, CSBs, mutual funds], income that could be realized from the sale of assets, etc.)
B = Your family’s monthly Budget needs (Including shelter, food, and household supplies, clothing, utilities, car maintenance, insurance [home and car], childcare, entertainment, etc.)
C = Costs associated with your death(Including funeral expenses, accounting and legal fees, probate costs, estate taxes, etc.)
D = Debts to be paid off (Including credit card balances, mortgages, loans, etc.)
E = Exceptional expenses (Including educational costs, vacations, major purchases [e.g., new car, medical equipment], etc.)
Begin by calculating the income your family would have, based on the existing income (from pension, spouse’s employment, etc.). Add the income that would be generated from your assets.
Once you know how much income your family will have, calculate the expenses they will face. Some will be one-time costs, such as your funeral or the payoff of existing debt; others are ongoing: monthly expenses and educational costs. The discrepancy between what your family has and what it will need must be covered in some way if you wish to minimize the financial impact of your death.
In deciding how much insurance you should buy, answer the following questions:
Will your estate have sufficient funds to pay for your funeral?
Will your estate have sufficient funds to pay your accounting, legal, and probate fees?
Will your estate have sufficient funds to pay the taxes owing at your death?
Will your estate have sufficient funds to provide the income required to meet your family’s day-to-day needs?
Will your estate have sufficient funds to eliminate any debts you have at death?
Will your estate have sufficient funds to provide for such priorities as the education of your children/grandchildren?