How Much Life Insurance Do I Need?

How Much Life Insurance Do I Need? Should you die, life insurance is the best way to ensure your loved ones are not left with a great sum of debt and stress. However, if like most people, you are unsure how much life insurance coverage you need, read on to find out how to arrive at an amount that offers your family solid financial security.

How Much Life Insurance Do I Need? What is covered by life insurance?

Since life insurance covers death (policy is payable when insure dies), the payout (coverage amount) depends on the premiums you pay. The premiums depend on the type of coverage you want but are also affected by your age, gender, smoking status, and general health.

In exchange for your premiums, your policy guarantees a pre-determined tax-free payout to the designated beneficiaries when you die. This amount goes to your survivors if your policy is valid.

Whether you buy term life insurance or permanent life insurance depends on you and your purpose of buying the policy, and you must determine what coverage amount you want your life insurance policy to cover. Like most people, you probably just want to cover your outstanding debt and funeral costs. If you are unsure how to determine the types of coverage needed, you can consult an insurance broker or provider.

The difference between term and permanent life insurance is that term does not build a cash value. Term insurance also has an expiry date which you choose the term when you are buying your policy. Once the policy expires, there is no payout to the survivors, unless you renew or convert your policy to a permanent life insurance policy.

With permanent life insurance, you continue paying the policy for life. You will also have the option to pay off your permanent life insurance policy in 10, 15 or 20 years which means you have to pay a higher amount of premiums monthly, but your policy will be paid off sooner and stays in force for life. Some permanent policies offer you more options, like an accrued cash value. Generally, term life insurance is more affordable, providing coverage during the years when families are still in debt and have dependents.

How Much Life Insurance Do I Need? How to calculate the life insurance you need?

Every family’s needs are unique and several factors determine what life insurance you need. When working out the amount, you must take several factors into account, including your existing savings. Stay-at-home parents often forget that they also need life insurance. This assists their spouse in covering the cost of hiring someone to assist with the family if something should happen to them.

One of the easiest ways to calculate how much life insurance to buy is to multiply your annual income by ten. Some say that you should add $10,000 per child for college costs.

However, the most comprehensive way to calculate your insurance needs is to look at a total picture of your debt, income, mortgage, and future educational needs of your children. This is commonly known as the DIME formula.

All the above are a good starting point but they don’t take the cost of services of a stay-at-home parent and the existing financial resources of the family into account.

It is always a good idea to consult with a financial advisor or life insurance agent, you can arrange a face-to-face meeting or jump on an online platform like zoom and ask your questions. If you do need expert advice AplusWealth licensed life insurance advisors are here to guide you, and the best part is, this service is free.

How Much Life Insurance Do I Need? Working out the formula!

It is estimated that most Canadian households have $423,000 coverage which experts believe to be far too small a coverage amount. According to Apluswealth, the different needs of every Canadian family requires that they work out their life insurance needs in the following way:

• Add together any outstanding debt to your annual net income and then multiply the amount by the years your family will rely on being insured.
• Then, add the amount left on your mortgage and the estimated cost of the education of your kids.
• Now you can subtract the income of the surviving spouse (including any pension they will receive on your death).
• Deduct any savings. However, it is advisable to only use liquid assets in this calculation because some assets can take a long to liquidate.

Now you have a good idea of how much life insurance you need.

Please note that if you want to purchase life insurance for estate planning purposes, the calculation is done differently.