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How Much Life Insurance Is Enough?


This is a common question. How much life insurance do I need? How do I figure this out? Where do we start? Let’s look at how to figure out the amount of coverage that you should have.

The basis of life insurance planning is a process called a needs analysis. This is a clinical name for a process that in reality isn’t all that pleasant to think about. When you are figuring out how much insurance you need you need to plan based on the idea that someone is sitting with your beneficiaries and delivering your death benefit cheque today. We can’t plan based on what we think we might need in 5 years. It needs to be now. No one knows when they are going to die, so the plan needs to be based on what happens if lightning strikes today. This is why it isn’t an easy process. No one likes to sit down and go through a process where they monetize their life and figure out how much would be needed by their loved ones if they weren’t here anymore.

The first step for a lot of people is looking at a list of their debts and figuring out what you would like your beneficiary to be able to pay off right away if you weren’t around any longer. The main one that comes up in this discussion is often a mortgage. Once the mortgage is figured out you may want to consider that there may be credit lines, car loans, student loans etc. that would need to be paid off. This is why planning with current numbers is so important. You can’t plan based on what happens with your debts if you pass away in the future. It needs to be based on right now.

Next take a look at what happens with your household income. There are two things to consider when someone has passed away. The first is that your income disappears, the second is that expenses associated with you disappear as well. What this often means is that looking to replace your entire income is not necessary, but supplementing things for a time period after your death is a strong plan as this allows the beneficiary some breathing room financially so they aren’t forced into any decisions.

Lastly, think about final expenses. The cost associated with a funeral can fairly easily exceed $10,000 and having insurance to help pay this bill will reduce stress at a difficult time.

How much insurance you need boils down to some personal questions. I always suggest that the answers should result in a situation where you would feel like beneficiaries aren’t forced into anything because they need money. Be it keeping the house or something smaller, no one needs the added pressure of feeling like they have no money when dealing with the loss of a loved one.

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