How Much Insurance?
Posted by Gail | Filed under Insurance
I recently received this question from a woman:
I have a question with regards to getting unbiased information with regards to life insurance. It seems like when you go to an investment dealer/bank they all want to sell you something. Is there any kind of formula for figuring this out?
Yup. Here it is: 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?
Once you’ve determined how much insurance you need, the next question is “what kind of insurance?”
But that’s for another day.
March 3, 2008 at 12:28 pm
The formula you have outlines is great, but HOW LONG do you factor in for the monthly expenses? Just until the grieving is over and then it’s time to get a better job to cover it? Or as a pension for the rest of the survivor’s life with some to spare for the kids at the end?
My agent seems to think I shouldn’t have any lifestyle changes at all if the husband passes. And his income should be replaced until out young children leave home. I think that is a little bit crazy. If my husband does die prematurely, I expect to have some time to mourn, our home protected from loss, and then carry on like a single parent, with hard work and pride… without a mortgage it should be attainable, and the extra just seems greedy and expensive.
What are your thought on that?
March 3, 2008 at 3:12 pm
Tracy, how long depends on where you are in your life and what you can personally accomplish. Like you, I’d need some time to catch my breath, then I’d pick up the pieces and get on with it. But think about the woman who has been a stay-at-home mom and has three or four young kids. Or the man who has depended on his wife’s income to make ends meet; now he has to find and pay for a caregiver for the kids, but bear all the responsibility financially. Each situation is unique, and that’s why there’s no “number” answer, just a process for figuring out what YOUR answer is.
June 25, 2008 at 3:56 pm
Hi Gail,
There is some new developments in disability insurance that your readers should know. For example Blue Cross has a disability policy on outstanding mortgages! Why is this excellent? Lets say someone is self- employed (low income). A private policy is based on “taxable income”. The mortgage disability because it pays a creditor directly has no barring on any disability policy that he/she may have.
If you are interested there is a number of other disability product devolpments I could share with your readers.
regards,
Brian Poncelet, CFP
September 25, 2008 at 5:34 am
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November 14, 2008 at 3:15 pm
So, with regard to age, at 55 I have been home for 20 years. 3 kids…..renting……so do we figure low, thinking well I will get a job to cover expenses or be realistic and leave policy as is to pay off debt/taxes/purchase small place to live(townhouse/condo??) If happened today, still have 2 kids and one university away kid. We were thinking of downsizing insurance coverage because high but if we did that, there would be no money left to purchase anything and I would have to get a good paying job. Should we just leave it?
August 21, 2009 at 3:50 pm
If only other webmasters would do what you have done and build a really worthwhile site on the subject. Most of them load the pages with junk, but this is exactly what I was looking for – How Much Insurance? « gailvazoxlade.com. Thank you from a very grateful Carrie Mason
December 17, 2009 at 4:46 am
This has certainly gives me some ideas. Thank you