Now that you are ready to buy life insurance; many people ask how much life insurance do I need? One important question to answer is, how much money will your family need if you die?
Everyone’s financial picture and priorities are different but they are 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 would need if you are suddenly gone and could no longer provide for them. Financial needs often fall into one of three categories: how much money will you need right away to pay for something such as funeral costs, legal and estate fees, and any outstanding loans, credit card debts 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 child care expenses that may occur and determine if you want to pre-fund future educational 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 families immediate needs let’s use the average new mortgage balance of two hundred and fifty thousand dollars, the average household debt of twenty seven thousand dollars and the average funeral cost of eight thousand dollars, for ongoing needs Jane, determined her family would need her income replaced for seven years and her salary matches the Canadian average: forty eight thousand dollars per year. Jane, would like to ensure that University education is funded for her children. With an average cost of ten thousand one hundred per year, without residence, this would result in costs of approximately sixty one thousand dollars for two children. The total need that Jane has identified for her family is six hundred and eighty two thousand dollars.
Step 2: is to determine the available sources of income Jane, as a group life insurance policy through her employer which is two times her salary and let’s say Jane as four thousand dollars in savings for total sources of income available of one hundred thousand dollars.
Step 3: is to calculate the difference by subtracting the existing sources of income form the total needs identified. We determined that Jane’s, life insurance need is five hundred and eighty two thousand dollars. Well five hundred and eighty two thousand dollars 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 twenty one dollars and twenty six cents per month –based on age, health and lifestyle she could purchase five hundred and eighty two thousand dollars of ten 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.