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How Much Life Insurance is Enough
I meet many people that say, “I have enough life insurance.” or “I have life insurance.” thinking that just because they have some random amount from their work or from an old policy they purchased 20 years ago that it will be adequate.
Whatever the reason, the first step is in the planning process. Determine if you have a need for life insurance and then, “how much is enough”.
If I were to ask you, suppose you left this earth tomorrow, what would your wife or husband do with the money you left behind? If you can answer that and the beneficiary is satisfied with the answer, then I guess you have enough. But most people could not; this is why you need a proper analysis done to determine just “how much is enough”.
In my experience doing this with over 200 families they were almost always surprised at the outcome and most were underinsured. Some were over insured meaning they were paying costly premiums that could have been earmarked to other insurance or investments.
A proper needs analysis starts with understanding that the ball of money that comes to a survivor is broken into two parts. The first part is the amount to pay off debts such as mortgage, car loan, student loans, credit card balances and others as well as paying funeral expenses and creating an emergency fund. The second part is replacing the income of the deceased.
The first part is easy and is more objective; the second part is where the client comes in.
You see, unlike buying fire insurance on your home where you have no control of the value, in life insurance you are the one determining your value.
The first question I ask is, if your spouse were to die, are you the survivor, still working part time, full time or not at all. This is an extremely important part of the planning process and determines income needs.
The second question is how long you want the income to last. The answer to that will increase or decrease the size of the ball. Obviously, the longer you need the money to last the larger the amount. I usually say the money needs to last at least until the youngest child is 20, but ultimately it is your decision.
Once we have determined the income and the length of time, we can subtract the loan or mortgage payments and about 10-15% for the deceased expenses. Then we add back income from CPP. There is usually a survivor pension based on age and how long the deceased has paid into CPP as well as an orphan benefit per child. To calculate the amount we need to pay that remaining income need we use a future value calculator and then add that to the ball we determined to pay off debts. Subtract any other life insurance or group life insurance from work and basically we find out just how much is enough.
This is a very simple analysis tool and tends to be accurate enough as to not leave the survivor stranded. The biggest thing is not in knowing how much, but what the money will do for you. You now have a definition of your life insurance, so if God forbid something did happen to either spouse, the other would know exactly what the insurance was designed for.
The reasons for life insurance vary from person to person and in this article I have only discussed the family plan.
Many people use life insurance for estate planning, business owners for buy-sell agreements or key person insurance; others need just a small amount for funeral expenses. Some want to give to a charity and yes, for the right individual, it can be a good investment tool.
SPEAK WITH YOUR ADVISOR
For a thorough evaluation of your insurance needs, please speak with our advisor.