Let’s start by addressing the biggest issue with life insurance. The thought of yourself or a loved one dying is really unpleasant. Now imagine that someone is sitting at your kitchen table with you and going through a worksheet where they put some numbers into it and it spits out an ‘amount’ that you would be worth if you died. That takes the unpleasantness to the next level. After many years going through this with clients, trust me, no one likes to talk about what happens if they die unexpectedly.
As unpleasant as that process sounds, it is important to think about because the alternative is thinking about your loved ones potentially being left in difficult or even dire financial circumstances. Add the idea of your family having to move because they can’t afford your house, kids unable to go to college or university because they wan’t pay for it or your partner back at work a week after your death because they need their next pay cheque. These thoughts should trump the unpleasant idea that you die unexpectedly.
Imagine what happens to your family if you are not here today. Now how much insurance do you need? Will a GoFundMe page set up after your death cover it?
The reality is that you need to plan based on what if something happened to you today. What do you want your beneficiaries to be able to pay for immediately and how long will they need help financially to adjust to things.
If you own a home the biggest monthly expense most people have is their mortgage payment. This is typically where you start. What debts would you want people to be able to pay off immediately? Mortgages, credit lines, credit cards, etc. These are the hard numbers and they are usually easier to arrive at. The more difficult the amount to arrive at is figuring out any extra money you want to leave behind. You can include a lump sum of money to supplement income for a few years or to help with paying for future expenses (i.e. post-secondary tuitions).
Once you have determined how much coverage that you need, you need to figure out if they are temporary or permanent life insurance needs. A mortgage is a great example of a temporary need. The amount of your current mortgage balance will be lower in 10 years than it is today. Structure your coverage accordingly… Use term life insurance to cover any large amounts that are temporary and consider permanent life insurance if you have an expense that isn’t going to go away (e.g. funeral costs).
The bottom line with figuring out how much you need is that I have never had a beneficiary tell me that they would take the money instead of having another day with the person who died. I have also seen the effects that good versus poor planning of how much coverage is enough can have. Put aside the unpleasantness and make the decision that gives your beneficiaries what they need right now.
In everyone’s self image they live until they are a ripe old age and die peacefully in their sleep after living the fullest life they could ever imagine. This isn’t how the world works though and you need to plan for it.