life insurance needs

How much Insurance do you really need?

If you buy too much, you will overpay for years, if you have too little, your beneficiaries will be left with liabilities. So getting the right amount is important.

Over the years I have found many people avoid adding in all needs because they are fearful of the cost. My suggestion, add everything you need, and they you can remove things later.

The purpose of Life Insurance is it protect someone from a financial loss (loss of income, the ability to pay a mortgage etc.). If there is no one impacted by a financial loss then their is no need for life insurance.

Using the D-I-M-E method you can quickly calculate your needs for life insurance.

The first thing to consider as your calculate your need for life insurance is debt. This includes your personal debt and credit cards. 
It is very common to have insurance coverage on your credits cards, but this can be very expensive insurance.

Adding coverage to your individual insurance policy is usually much cheaper than having coverage on a number of credit cards.

I-ncome Replacement
Once you have paid off all debts … next question is how much coverage will you need to replace the loss of income to the house hold.
The industry estimate used for loss of income is 70% of your partners income multiplied by 8-10.  The higher number is used if you need loss of income for longer periods. (15 – 20 years for when children are at home for example)
This calculation is also dependent on whether the beneficary will continue to work. If you have enough income individually then there may not be a need for income replacement. 

The next step is add the outstanding balance of mortgage / line of credit to the total.
It might make sense to get an updated balance from your bank for this. Make sure to include any second mortgages or lines of credit if backed by your home.
If there is no mortgage on your home but your surving partner can longer live in the home after your death (ie. the home is on a family property that cannot be subdivided) then it might make sense to purchase enough life insurance to buy a new home, even if there is no mortgage.

If you have children and education cost is an concern, then the next step is to add the cost of education to the your insurance needs total.
Make sure to include living expenses if you expect to pay for this as well.
How much Life Insurance is Enough for you?
All you have to do now is total everything up and you can approximate your needs for life insurance.

Again make sure to add everything in … you can always remove items you don’t want to cover.

Debt  – personal debt + credit cards = $35,000
Income – 50,000 annual income loss x 70% x 8 = $280,000
Mortgage – 375,000 balance = $375,000
Education – 4 years tuition 15,000 = $60,000

  Total –  $750,000  

Now you know the math … are your over insured or under insured?

There is no point in paying for life insurance you don’t need or buying too little coverage … and once you know what you need this process is so much easier!

(This calculation is just an estimate and is provided for educational purposes. Your financial professional should provide a precise calculation on your current life insurance needs using the same criteria at your annual review.)