The following post is a sponsored post with Sun Life Financial; all thoughts and opinions are my own.
When it comes to insurance, I’ll be the first to admit, I’m at a bit of a loss. It’s not that I don’t understand the different types of insurance (we can get into that another day). It’s that I don’t know how much term life insurance coverage I should have. When I talk with friends, the biggest question around this area is, “how much life insurance do I need?”
There doesn’t seem to be a clear-cut answer.
Is it $500,000? Am I safe with $100,000? My boss said more than $1,000,000! Can that be right?
Everyone has had someone give them a number. With all that confusion, we tend to go glassy-eyed and move on, leaving our families future up in the air.
So let’s clear up the confusion, shall we?
How Much Life Insurance Do I Really Need?
First things first: Life insurance is incredibly personal. There is no one right amount for everyone. This isn’t a “one-size-fits-all” situation.
The amount of life insurance I need is going to be different than it will be for you.
So let’s get down to the facts.
The fact is that your personal finances affect the amount of life insurance you are going to need.
For a few minutes, let’s dive into what information you need. That’s how you can make sure you have enough coverage for your family should they need it.
After that, we’ll have a plan and be able to move on.
What do you need life insurance for?
Before you decide how much life insurance you need, here is why you need it. Life insurance is designed to give your loved ones a lump sum amount of money when you die, so they have enough cash available to them when they need it.
It’s really simple. If you figure that your family needs to replace your take-home income of $50,000 for the next 10 years, then you would need $500,000 worth of insurance. That way your family could take $50,000 out every year to cover their expenses.
That’s what you are looking to do. Provide for your family so they don’t need to worry about money after you’re gone.
There are a few things that you’ll need to get going with this, so let’s get started.
Start with the Basics and Some Quick Money Information.
First step, some personal information. This is all information you likely have in your net worth statement. It should be a breeze!
You are going to need your basics: Age, gender and whether or not you are a smoker.
Next step involves knowing the value of your savings, investments and any other existing life insurance. For instance, your work may have a group policy, or you may have a policy already.
Here is why this is important: If you know how much you already have, it will affect how much more life insurance your family might need. These are the two most important parts of this equation.
Or to put it another way: If you need $500,000 in life insurance, but already have $100,000 in insurance, then you might need $400,000 in life insurance.
Next Liabilities and Expenses
If you’re like most people, you’re carrying some debt, and that’s fine. You need to know the amounts you still owe and write them down.
Jot down car loans, mortgages, student loans, credit card balances and any other debts.
You want to have all of these written down in a safe place that your family knows about, so that they can get paid off in case something happens to you.
The idea is that your family’s life will run a lot smoother if they aren’t worrying about paying the mortgage (and other debts) every month.
Ideally your family will want to wipe out any debts that you owe so that they can move forward with a clean slate (i.e., no debt).
Any Other Big Life Expenses?
What big life events will you need to cover? What will your kids need before they become adults?
Child care? College? Weddings? Extra help? A trip to Disney World?
You will want money to cover those things in there.
One other thing: Remember to include funeral expenses. Funeral expenses can range anywhere from $4,500 to $15,000. One more item to include so you know you are covering all the bases.
How Much Money Does Your Family Need from Month to Month?
Lastly, and in my opinion most important, you arrive at the income your family will need.
For this, you will need a few numbers, such as:
- Your monthly net income (the amount on your paycheque)
- Percentage of that income your family will need to live on
So, if you are the sole earner, then it’s 100%. If you and your spouse both work, and the family can live on your spouse’s income alone, then you could put 0%. Or you could choose a number anywhere in between — it’s up to you and your situation.
Like we mentioned in the beginning life insurance is personal.
Finally, you’ll need to know how long your family will need support.
There are two thoughts on this:
- Until your youngest child turns 18. Personal tip: With kids prolonging their stay at home, I would go on the longer side of things. I’m not hearing of a lot of people’s kids leaving home at 18 – maybe when they graduate college.
- Until your spouse retires.
There are many other ways to determine this. Determine the way that makes most sense to you.
Now Here’s the Best Part
Don’t you think an online calculator would be super-useful for something like this?
That’s why Sun Life has created an online calculator to help you figure out how much life insurance you need.
It takes two minutes to do. When you’re done, you’ll have a good idea of how much life insurance you need and what it can cost. You can find the calculator here.
After going through it, I know we have enough coverage for our family.
While thinking about insurance might not be on the top of your to-do list, you will be eternally grateful to have it should something unexpected arise.
As parents, we owe it to our families to take care of them, both when we’re around and when we’re not. That’s why it’s important to plan ahead. Knowing you have the right coverage is like giving yourself a financial A+.
Take some time and figure out how much life insurance you need. My premiums cost me less than a Tim’s double-double a day (if you are outside Canada, that’s a regular coffee with two creams and two sugars). That’s more than worth it for my family’s financial security.
- Get your life insurance quote online from Sun Life.