How much life insurance do I really need?

I was sitting down with a good buddy of mine and he asked me this question. It is a common conversation among many of my clients when shaping the risk management side of their financial plan.

We had a pretty good talk about the ‘ins and outs’ of life insurance and at first, I wanted to title this blog “Do I really need life insurance?” (which is a whole different blog on its own), but I know the audience of this blog. You, like myself, are invested in your children’s well being and passing away can affect that tremendously. Aside from the emotional effect, there is a significant financial strain. Everybody’s insurance needs are different and as you read this blog I’m hoping that I can help you understand what your need is.

Most people have life insurance; however, most aren’t protected.
What do you mean I’m not protected? I was already approved.

You are correct and your policy is in place. However, I’m using the word ‘protected’ in the sense of protecting you and your family financially.

Many clients sit down and tell me that they want $200,000 in life insurance and I say “Great! How did you come up with that number?” The usual response is “I think that would help my family.” I agree that it would ‘help’ their family pay off a few bills and maybe even their mortgage but is that enough to survive long term? I’m sure you have seen many GoFundMe posts that say otherwise. A full analysis should be done when looking to protect what matters to you most. I wouldn’t feel comfortable just taking that order without you fully understanding your need first.

So how do we know what your need is?
Like I said at the beginning, everybody’s needs are different and whether you are a household that builds a lifestyle that requires a dual income or single income there are 4 different categories that everyone should focus on – this is what I call my L.I.F.E. needs analysis.

L – Liabilities and Loans:

According to CBCNews, in 2016 the typical Canadian owed $21,348 in consumer debt (I always knew I was above average), that does not include mortgage debt. Leaving your family with this responsibility is a huge burden if you don’t have coverage in place. If you are married or common law most of these will transfer over to your spouse to pay. If you are single, creditors will come after your estate for payment leaving less for your kids. In this category, list out everything you owe. Mortgages, credit cards, car loans, ect.

I – Income:

Regardless if you are the bread winner for the family or if you are a stay at home parent. What you do either provides income for the family or saves the family money. Without that income/saving you will need to have that income or savings replaced to maintain their current lifestyle. How much do you make/save a year and how many years will you need to provide for your survivors? For the parents that earn a wage it’s a pretty easy calculation: Income X number of years that your spouse can survive. For those of you that provide the intangibles, who would your spouse need to hire in order to keep the house running in good order? House keeper? Nanny? Multiply that by the number of years the kids are self sufficient and that adds up.

F – Funeral and Final Expenses:

How big do you want your funeral to be? The average North American traditional funeral costs between $7,000-10,000. Will there be a significant tax implication in your estate that you want to take care of? This one can be quite simple or more complex depending on your situation.

E – Education and Extras

Do you want your kid’s education paid for? Well if you are not around it won’t happen unless you account for it in your planning. Here is a snapshot of an average first-year undergraduate arts and science full-time student fees:

In terms of ‘Extra’, this is the catch all. Did you want to leave a legacy or donate to charity? Maybe want to donate to your favourite Dad Club, hint, hint, wink, wink? This is where you want to factor those numbers in.

Everybody’s situation will be different in each of the categories as will everybody’s priorities. Some will have mortgages to pay off some won’t. Some will want to pay for their kids education and some will want them to work for it. The best thing you can do is sit down with an Advisor and find your need. They are the experts at doing these types of analysis and will help you with the next step in the process to determine if term or permanent insurance is best for your solution. Typically, most plans are a combination of both but I’ll leave that for another blog.

Chris Capangyarihan, DCL Member

Investment &Insurance Advisor
(519) 857-6805