When considering purchasing life insurance, a lot of people can go back and forth with how much coverage they need to make sure they are well protected. They want to make sure they have enough coverage to look after their loved ones, but do not want to be over-insured. Typically, when evaluating insurance needs, we would use 3 categories to determine the amount of death benefit someone would need.
Debt protection – Usually, at the very least, you want to cover off all of your debt (mortgages, car loans, student debt, etc.) in the event that something happens to you so your family does not have to worry about the expense in the event of your death.
Income replacement – This is more of a working amount that can be different in various situations depending on the family dynamic. Typically, in a family setting with young kids, the question becomes how much income would be required to cover off living expenses if one of the spouses were to pass away. A standard number in the industry is usually 70% of after-tax income, then multiplied by a factor between 5 and 10. The term of the policy should match the timeline of your child(ren) reaching adulthood.
Kids Education – This is another moving target, as it can depend on the amount of savings you would have already set aside in RESPs, as well as how much money you want to provide for your child in their post-secondary education. Typically, the total amount of coverage used in this scenario is $40,000/child (4 years x $10,000/year)
Later in life, the discussion of insurance coverage switches to covering off tax liabilities and final expenses but for the purposes of this article we just wanted to focus on the proper amount of coverage for young families. Also, don’t forget to ask your Advisor about Critical Illness and Disability insurance when evaluating your life insurance needs.
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