The big question: How much life insurance do you need?

The big question: How much life insurance do you need?

Having the right amount of coverage is key in protecting your family

By Peter Boys, CAFA

The Financial Coach

You’ve decided you need life insurance, but how do you determine what’s enough to protect your family or business financially? It’s a difficult question to answer, but it’s crucial to have the right amount of coverage. You want to ensure that your insurance will cover expenses and maintain a lifestyle for your beneficiaries.

Needs-Based Assessment: A needs-based assessment considers what cash and income needs your beneficiary or beneficiaries will need to sustain their current lifestyle. Cash needs include: funeral fees (last expenses), tax liabilities, legal fees, outstanding loans and mortgages, and an education fund for school-aged children. Also, you need to include your family’s current annual income and lifestyle. Within the above-mentioned cash needs, some may be categorized as permanent or temporary. Temporary cash needs are the costs that most people pay out during a set period such as a mortgage and their children’s education. On the other hand, end of life needs are costs including funeral expenses, probate fees, tax liabilities, legal fees, and an emergency fund that are required at death. It’s worth considering purchasing some amount of permanent insurance that will last your whole life to cover these permanent needs.

READ MORE: There are always new scams to be aware of: Peter Boys. Don’t send money to someone you don’t know

Application of the Needs-Based Assessment: There are various things to consider when determining the amount of insurance you need to cover your family’s immediate and ongoing needs upon your death: 1) How much savings do you have? 2) How much personal insurance do you already have? 3) Do you have insurance through a work plan? 4) What benefits are available from the government?

Take for example, Josh and Rachel have two young children, Rachel is a stay at home mom and Josh is a teacher with an income of about $60,000 after-tax. They have $50,000 in end of life needs including last expenses, outstanding loans, legal fees, and an emergency fund. Josh and Rachel have estimated that the cost of their children’s education could amount to $80,000. Additionally, they have a $275,000 mortgage and they are aiming to pay it off over the next twenty years. These necessary costs amount to $405,000. These represent cash needs.

Josh knows that he would like to support Rachel and their children financially for as long as their children are dependent. He needs to cover 50% of his income to do this. As the insurance death benefit is not taxed, and because he plans to insure the cash needs, he does not need to replace 100% of his income. Using the needs-based assessment approach, their insurance advisor helped them to determine his surviving spouse’s income needs. This was to help determine how much insurance would be required to cover any shortfall in the event of his death, which in Rachel’s case would be $25,000/year. Moreover, by factoring in inflation and a reasonable rate of return on the insurance proceeds, their advisor determined that Josh requires an additional $400,000 of coverage. With the help of a needs-based assessment and considering that they do not have any current life insurance or substantial assets, it was determined that Josh will need a policy of approximately $1 million.

READ MORE: Avoid first-time homeowner mistakes

Now What? Once you understand the basics of needs-based assessments, you know that having the right amount of coverage is key in protecting your family financially. Without the right coverage, your family could have trouble paying for the necessary costs such as legal fees and last expenses. If you would like to learn more about how much life insurance your family needs, speak with a trusted insurance advisor today.

Like us on Facebook and Follow us on Twitter

Just Posted

Flashback Freddy performs at Entertainment in the Park on July 7th.
photo submitted
Flashback Freddy to hit the ‘Entertainment in the Park’ stage on July 7th

Held at West Stettler Park, all shows start at 7 p.m.

The Government of Alberta identified 115 new COVID-19 cases Sunday, bringing the provincial total to 3,089.
(Black Press file photo)
Red Deer drops to 71 active cases of COVID-19

Province adds 127 new cases of the virus

Stettler town hall
Town of Stettler well situated for future according to new report

‘It is really reassuring to (see) areas where we can focus to grow better’

kids
Lots of fun and learning to be found at the brand new ‘Market Buds’ program

Activities to run the gamut from outdoor games, treasure hunts and storytelling to seed planting and interactive games

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

A dose of the Pfizer-BioNTech COVID-19 vaccine is pictured at a vaccination site in Vancouver Thursday, March 11, 2021. THE CANADIAN PRESS/Jonathan Hayward
NACI advice to mix vaccines gets varied reaction from AstraZeneca double-dosers

NACI recommends an mRNA vaccine for all Canadians receiving a second dose of a COVID-19 vaccine

Bruce Springsteen performs at the 13th annual Stand Up For Heroes benefit concert in support of the Bob Woodruff Foundation in New York on Nov. 4, 2019. (Greg Allen/Invision/AP)
Canadians who got AstraZeneca shot can now see ‘Springsteen on Broadway’

B.C. mayor David Screech who received his second AstraZeneca dose last week can now attend the show

A lotto Max ticket is shown in Toronto on Monday Feb. 26, 2018.THE CANADIAN PRESS
No winning ticket sold for Friday’s $70 million Lotto Max jackpot

The huge jackpot has remained unclaimed for several weeks now

Canadian Prime Minister Justin Trudeau is seen during a joint news conference following the EU-Canada Summit, in Brussels, Belgium, Tuesday June 15, 2021. Trudeau says Canada is on track now to have 68 million doses delivered by the end of July, which is more than enough to fully vaccinate all 33.2 million Canadians over the age of 12. THE CANADIAN PRESS/Adrian Wyld
Vaccine deliveries enough to fully vaccinate all eligible Canadians by end of July

Three in four eligible Canadians now have their first dose, nearly one in five fully vaccinated.

Chief Public Health Officer Theresa Tam listens to a question during a news conference, in Ottawa, Tuesday, Jan. 12, 2021. The number of confirmed COVID-19 cases attributed to the highly contagious Delta variant grew in Canada this week. THE CANADIAN PRESS/Adrian Wyld
Canada’s public health agency reports spike in confirmed cases of Delta variant

More than 2,000 cases of the variant confirmed across all 10 provinces and in one territory

The federal government says it wants to ban most flavoured vaping products in a bid to reduce their appeal to youth. THE CANADIAN PRESS/AP-Craig Mitchelldyer
Health Canada proposes ban on most vaping flavours it says appeal to youth

If implemented, the regulations would restrict all e-cigarette flavours except tobacco, mint and menthol

The Montreal Police logo is seen in Montreal on Wednesday, July 8, 2020. Some Quebec politicians are calling for an investigation after a video was released that appears to show a Montreal police officer with his leg on a young Black man’s neck during an arrest. THE CANADIAN PRESS/Paul Chiasson
Probe called for after video appearing to show Montreal officer’s knee on Black youth’s neck

Politicians call for investigation after clip evokes memories of George Floyd incident

Most Read