How much life insurance do I need?
Figuring out how much life insurance you need is a personal process. To come up with how much life insurance you require, you have to take into account your personal finances and debts, as well as your lifestyle and goals. Fortunately, it’s easier than ever to evaluate how much life insurance you need by using online life insurance coverage calculators.
You have decided that you need to buy a life insurance policy, and now wondering, just how much life insurance do I need? Determining the amount of life Insurance coverage one needs involves analysis into one’s finances and current lifestyle expenses.
Everybody would love to leave a fortune for their family when they die and wonder how much life insurance is the right amount.
After all, when you’re gone, there’s going to be a giant you-sized hole in their lives. They will have lost a parent, a spouse, a sibling, a child… bummer is an understatement.
It’s natural to think that with a multi-million dollar term life insurance policy, if you die, at least your family will never have to worry about money for the rest of their lives. So choosing a life insurance coverage amount should be a no-brainer right? The higher, the better!
While that’s a wonderful sentiment and an admirable goal, it’s frankly, not that realistic for most people to own such a large life insurance policy. The higher your death benefit (the payout when you die), the more expensive your premiums become. If you can’t afford to pay for your policy, your dependents will receive nothing should you end up having to cancel it.
On the flip side of that coin, you don’t want to pick too little life insurance coverage and 20 years down the road, should you die unexpectedly, your dependents might end up receiving just enough to cover your funeral expenses. Our survey for Life Insurance Trends has shown that Canadians are underinsured.
It’s quite a conundrum. So, really, how much life insurance coverage should you get?
How do I determine how much life insurance I need?
The best way to get the answer to that question is to use a life insurance calculator that performs an instant audit of your personal and financial situation. By getting a clear picture of your assets and liabilities, you’ll be able to accurately make an assessment of your family’s current financial needs, and realistically estimate the right amount for your life insurance policy.
But wait, hold on! Before you close your browser, there’s good news. Our life insurance needs calculator can help you do all of that in a matter of minutes. We focus on a few key areas of your finances to keep things simple; with a little bit of math, we’re able to paint an accurate picture of the life insurance coverage amount you’d need.
Do you owe anybody money? We’re not talking about your buddy for dinner last week, but rather substantial debts. If you die unexpectedly tomorrow, someone is on the hook for paying back any debts you owe. This is one of the main motivating factors in getting life insurance. An appropriate life insurance coverage amount gives you peace of mind knowing your spouse, children, or even parents wouldn’t have to deal with your mortgage payments on top of grieving your death. Though one may cancel the other out…
The primary source of debt for most Canadians is usually their mortgage. But it’s not uncommon to have balances owing on outstanding debts like lines of credit, credit cards, and student loans.
The sum of these liabilities can be used as a starting point for figuring out your coverage needs.
How much life insurance do I need to cover my family’s living expenses?
The next step in figuring out your life insurance coverage needs is assessing how many dependents you have and how much of your after-tax annual income they rely on.
A dependent is anyone who needs your financial support. If you’re the primary breadwinner in your household, have kids or plan to have kids, then you already have or will soon have dependents. You may also have elderly parents or disabled family members that depend on you financially; their needs should all be considered when calculating the life insurance coverage amount.
Aside from the number of dependents you have, you’ll also want to consider the actual dollar amount they require from you annually to support them.
Does your partner earn a salary, even if you pay most of the bills and cost of living? How much rent or mortgage does your family pay? What about food, clothing, utilities, etc.? How much would they require in cash every year to maintain their standard of living? These are important aspects of one’s financial plan to consider when deciding how much coverage one needs.
What percentage of my after-tax annual income do I think they’d need?
Other things to consider are the ages of your children and your partner. They may only need the annual figure above for a temporary amount of time. If your children are teenagers, for instance, they may be self-sufficient in less than a decade. Figuring out the length of time they’d need financial support is a crucial aspect of calculating your coverage needs and determining if term life insurance is right for you.
How much coverage do I need to plan for my children’s education?
Tuition fees are a cost your children will likely encounter in their lives and can be accounted for by your life insurance policy. That’s why we factor in university education fees in our calculator. Just one year of tuition, books, lodging etc. can cost around $20,000 on average. It’s a major expense that might not be economically possible if your children were to lose your salary. Therefore, many people account for those costs in their coverage amount.
How much coverage do I need to provide for the future?
Life insurance is not just about covering your debts and your family’s living expenses. It can also be an opportunity for charity, or to provide financial assistance to family and friends during major milestones in their lives that you would be missing if you were to pass away. Things like a down payment on a house or condo, wedding costs for your children, or donations to charities can also be planned for with your death benefit. It’s also wise to include around $10,000 to cover expenses that aren’t really optional, such as funeral costs.
How much life insurance do I need to protect my savings?
Do you have any savings? Whether it’s liquid assets, an investment portfolio, an RRSP you opened at 19, or wads of cash stuffed under your mattress, any assets you’ve stored away can help reduce your life insurance coverage needs.
While some people may choose to reduce their life insurance coverage amount based on their savings, others may purchase life insurance to protect their life savings against future expenses. That way, their dependents won’t need to dip into savings that have been allocated for long-term growth (like investments) or sell assets (such as a home, car, etc.). Existing life insurance plans you might have should also factor into your total assets as they would likely pay out upon your death.
Discussing life insurance coverage with your dependents
Crunching numbers gives you the cold, hard, facts about your family’s financial needs. But don’t forget to discuss the situation with your loved ones as part f your financial protection plan; talk about what they think they’d need if you were to die.
No one enjoys planning for death, but you can make a clear-headed decision if you talk everything through with those you hope to protect.
If your partner has their own annual income and you do not have children, a $1,000,000 term life insurance policy, while incredibly supportive, might not be necessary if they don’t need that income replacement. Whereas if you have a large family with young children who will need their cost of living met for over a decade, plus tuition fees and inheritance, and a mortgage balance on top of that, perhaps $1,000,000 isn’t out of the question.
What kind of life insurance do I need?
One last consideration is the type of life insurance you choose can influence how much you need. Some types of life insurance like term policies are designed to cover large amounts of debt that are temporary in nature or to cover your annual salary while your dependents are still counting on you as a main breadwinner. In contrast, permanent life insurance would cover you for your entire lifetime, and you may only need a small amount of that type of coverage to handle final expenses or estate taxes.
How much life insurance coverage should I buy?
Once you talk things over with your family and enter your financial information into our calculator, we’re able to suggest a coverage amount you can trust matches your needs and get you on your way to finding life insurance quotes. If you‘re still not sure how much life insurance you need, that’s perfectly ok. Feel free to experiment with different coverage levels in our online tools until you find the perfect match, and read further about the right time to buy life insurance, or more in our honest guide to life insurance.
The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail. All rights reserved.
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- Debt is one of the key considerations when choosing life insurance coverage. Make sure your policy will cover any major debts you have, such as a mortgage.
- If you plan to use life insurance for income replacement, take into account your dependents’ expenses and needs.
- When choosing a life insurance coverage amount, it is also important to ensure you can afford the premiums.
- Some brokers suggest using the DIME method, accounting for Debt, Income, Mortgage, and Education expenses, but a life insurance needs calculator can asses your needs in more detail.