How Much Life Insurance Do I Need?
Life Insurance for Family Needs
Ranges of 10-15 times your gross income are common for families with children.
For many consumers, life insurance is intended to maintain their beneficiaries’ lifestyles upon the death. Basic principles of insurance suggest that we should be looking at catastrophic financial loss. Combining these two points means that we should look at what financial aspect is lost in the event of a family member’s premature death – and for many of us that is our income.
Our income or our paycheque drives our lifestyles and our standard of living. Upon death, that paycheque is lost. If we treat life insurance as a replacement yearly paycheque instead of a lump sum, then we can use it to solve our standard of living problem upon our death. (Mortgages and other debt are not financial losses, they’re simply part of the lifestyle covered by income so we don’t generally treat them seperately.)
- How much of your income does your family need to live on?
- If you passed tomorrow, how long would your family need that income for?
Answering those two questions lets you calculate a total life insurance amount that will maintain your family’s standard of living. We recommend that you try different scenarios in order to get a sense of a range of coverage amounts. Also, keep track of how long you need to replace your income as you’ll use that number in step 2 where you review the types of insurance.
|Year||Insurance||- Income||+ Interest||= Remaining Insurance|
Life Insurance Dual Income No Kids
Outstanding mortgage amount plus other debt is a common amount for dual income no kids.
Two income earning spouses without any other financial dependants often assume that each partner would not be able to maintain the family home and mortgage but would be OK otherwise. This situation covers both Dual Income No Kids, as well as younger empty-nesters who are still earning a paycheque.
While you can certainly use the above calculator and an assumption of each spouse’s income required to maintain lifestyles, in this case a simplification often works well. Simply take the amount of the mortgage plus any debt repayment as the amount of coverage required. In the event of a spouse’s death the surviving spouse is assumed to be able to maintain their lifestyle using their own income now that the mortgage and debt is paid off.
Final and Burial Expenses
Amounts of $10,000 to $50,000 are common for final expense life insurance.
If you are seeking final expense life insurance there’s a number of factors you may consider including:
- Burial costs vary but amounts between $10,000 to $25,000 are common.
- Debt cleanup, simply the cost of any expected remaining debt upon your passing.
- Estate creation which is the technical term for “leaving money behind to beneficiaries’.
Simply total any or all of those three points to arrive at a total.
Group Benefits/Life Insurance at Work
Generally you should ignore your life insurance at work when calculating your total, or treat it as rounding or top-up.
Workplace life insurance has a number of problems when compared to individual life insurance policies. Workplace life insurance:
- has premiums that are not guaranteed, and can change every year.
- has premiums that increase every 5 years of age – so exercise caution when comparing this year’s workplace premiums that increase, with life insurance premiums that remain level for possibly decades.
- If you lose your job or workplace benefits are reduced, then the coverage can become problematic.
These deficiencies mean you should exercise caution when accounting for workplace life insurance in your overall coverage needs.