Figuring out how much insurance you need is easy if you stick to fundamentals. Simply answer one of two questions:
- How much money do you lose if you die or
- How much money do you need to create at your death.
Life insurance for young families, two incomes
For young families, the amount of life insurance is normally intended to maintain a family’s standard of living. Mortgage life insurance is often used (incorrectly) as a proxy for the standard of living. However your mortgage (or your mortgage payment) is not your standard of living. Your standard of living is driven by your paycheque.
When we die, we lose our paycheque. Replacement of one’s paycheque (via life insurance), over a number of years, then allows our family to continue to maintain their standard of living after we pass away. Think about it this way – if you are earning $60,000 today, and if you pass away if the life insurance company provides your family a new $60,000 paycheque, then they can continue to live just as they are now, right? That being the case, determining how much life insurance you need for young families is simply a matter of taking your paycheque and multiplying it by some number of years. For example, if you have young children, you might use a time period of 20 years (until they’re out of the house). 20 years X $60,000/year income = 1,200,000.
For a calculator that uses this basic premise but throws in some additional factors like interest, see our How Much Life Insurance do I need? Calculator. Run the calculator using different scenarios so you get a sense of the range of coverage you may consider.
Life insurance for young families, One income
If one parent is stay at home, and one is earning an income, see the above calculator to determine coverage for the income earner. For the stay at home parent, we suggest you consider either $250,000 to $500,000 of coverage. Alternatively, some people prefer to have identical coverage on both parents, if so then the stay at home parent simply has the same coverage as the income earner.
Life insurance for Dual Income, No Kids
With two adults who are seperately and individually financially independent (i.e. You’re not completely dependent on your spouse’s income) it’s less about insuring ‘loss’ and instead becomes an issue of how much wealth you want to create upon your death.
A typical approximation would be the outstanding balance on your mortgage, plus any debts, plus round it up a bit. Should a spouse pass away, the surviving partner has the mortgage paid for, debts are removed, and there’s a bit left over. The surviving partner then (financially) continues on living off simply the proceeds of their own income.
Conversely you may assume that you are not dependent on your partner for their income at all. With that assumption, your may consider either a small policy simply for burial expenses, or perhaps no insurance coverage at all.
Life insurance for seniors and retirees
Couples who are nearing or into retirement typically don’t need to replace income, and would be expected to have more assets and less debt, along with no financial dependents. If that’s you, you may consider enough insurance simply to cover burial expenses. Such a policy is normally in the $25,000 to $50,000 range.
If you choose to use life insurance for wealth creation, specifically to leave money to children or grandchildren, then the burial costs plus whatever amounts you would like to leave your family is the simple calculation we would do.
Feel welcome to contact us if you have any questions about determining how much insurance is required – please call us 1-877-344-4011