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. Therefore if we use life insurance to create a new paycheque then our beneficiaries should be able to continue to live at their current lifestyle and neither become rich nor have to lower their lifestyle. 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.
Life Insurance for Family Needs
How much of your paycheque would allow your family to maintain their lifestyle? And if you passed tomorrow, how long would they need that retirement 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.
Ranges of 10-15 times your gross income are common.
Life Insurance 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.
Outstanding mortgage amount plus other debt is a common amount to use in this situation.