Shopping for life insurance in Canada may not be as easy as what one may think. There are a lot of decisions that come with buying life insurance. A life insurance shopper has to put the time aside to attend to this important matter. Out of the many different decisions that need to be made, one will be how much life insurance to buy. This is probably one of the toughest questions when it comes to buying this type of insurance product.
How Much Life Insurance, Do I Need Rule of Thumb?
There are basic standards that one can rely on when determining how much life insurance they need. Often referred to as a rule of thumb. While this can be used as a starting point, the insurance shopper needs to go into this deeper. What has to be realized is that life insurance is a personalized product. Meaning that the needs and wants of each insurance shopper are going to be different. Therefore, there can be no one set rule of how much an individual should buy to protect their loved ones.
Now and In The Future
A starting point to find the basics is how much money the insured is making now to sustain the family. Which will likely be the beneficiaries of the life insurance policy. Usually, this is a salary that the insurance applicant is making. The general rule of thumb is to multiply this by 7 to 10 times to come up with a reasonable amount.
An example would be if an individual brings home $60,000 on a yearly basis to multiply this by ten would indicate that a life insurance policy of $600,000 would be adequate. Looking at this amount one now has to forecast whether this amount of money would be enough to maintain the lifestyle for the beneficiaries that they currently have.
Looking at this type of formula means that the beneficiaries based on this money could sustain their lifestyle for the next ten years.
A good question for the insurance applicant to ask themselves is if they would be able to manage themselves financially on this $60,000 a year for the next ten years themselves. That would mean having no raises or any changes in their current circumstances. If they are managing well now on the sum of money. Most likely many individuals would not feel comfortable making this assumption.
How Do You Determine How Much Life Insurance You Need?
An additional approach may be to start with this ten times formula and then expand upon it. It means putting oneself in the shoes of the beneficiary. If they were to receive the $600,000 today what would their obligations be with this money? Here are some examples:
- The spouse will probably want to pay off the mortgage on the house.
- If there is any credit card debt or car loan, this may get paid off.
- The money will need to be set aside for the children’s education in the future.
- If the spouse has been a stay-at-home partner, they may want to go back to school. This will mean that there needs to be a certain amount of money set aside for living expenses during this time.
Is It Enough?
Based on these factors and using the example formula of $600,000 would this be enough?
- Statistics show that as of 2017 the average family holds a mortgage of about $310,000. ( as of September 2017).
- Research is showing that the average debt for a family outside of a mortgage is $22,837.
- Then for student debt, the figures are alarming. If the student is going to live at home their average cost for education is about $9,300. a year. If they are going to live away from home they are looking at $20,000. Students can be enrolled in courses from 3 to 5 years.
- Spouses may get a break in the education costs currently. But, that can change every time a new Government steps into power.
Looking at the current stats can help make the forecasting for life insurance a little more realistic.
Based on these statistics a beneficiary left with two children would have a debt load of;
$ 22,837. misc. debt
$55,800 education ( based on two kids going to university for three years – while living at home.
The next decision would be if the balance left is enough to maintain the lifestyle of the beneficiaries for their future.
How Much Insurance Do I Need Calculator
There are many different forms of life insurance calculators that can be used as a resource. They all possess the same basics with a few small variations. These can be used as a starting tool. Then further calculations can be done based on the personal needs of the insurance shopper.
What Kind of Life Insurance Do I Need?
Once it has been determined how much life insurance is needed the next big question is what kind of life insurance should one buy? There are going to be choices such as;
- Universal Life Insurance
- Whole Life Insurance
- Permanent Life Insurance
- Term Life Insurance
Which of these are going to be the best choice is again going to depend on individual circumstances. Also, the purposes. Which in this case the focus is being put on sustaining the lifestyle and needs of the beneficiaries.
Affordability of Life Insurance
The next challenge will be affordability. Buying life insurance is creating another expense.
For those who are on a budget and don’t mind having flexible insurance coverage then term life may be a good option. An example of costs would be for a male who is age 42 and doesn’t smoke the cost for about $150,000 in coverage would average about $27. per month.
The other types of insurance may be more expensive. But, they may also offer additional benefits. Such as including investments while offering life insurance coverage.
Shop for Life Insurance Best Suited For You
No matter which type of life insurance you decide to buy, it is important to shop for it properly. Start by getting some quotes based on your insurance wants and needs. You can get quotes on the different types of life insurance products. Then with the information, you are provided with start tieing it all together. Making sure that it meets these needs;
- It is going to give your beneficiaries the financial stability they need.
- That it is the right type of coverage based on your personal circumstances.
- It is going to be affordable now and in the future.
- There is some flexibility to it in case circumstances change.
Thinking through the options for life insurance and your circumstances will help you make the right decisions.