How do you ensure that the family and dependents you leave behind when you die are looked after? How do you ensure that there is enough money to cover your final expenses and give you a suitable funeral?
Life insurance can be tough to consider but necessary if we want to financially secure our family and loved ones and ensure they are looked after. It can help cover your final expenses and take care of your family, who depend on your income, if you pass away before they do.
However, most Canadians ask, “How much life insurance do I need?”
The answer to this question is unique to everyone. Here, I will work you through some methods to help you determine how much life insurance you need so you don’t get underinsured or overinsured.
How Much Life Insurance Do I Need?
There is no quick answer to the question, ‘How much life insurance do I need?’ Everyone’s financial situation is different and unique.
While some Canadians need life insurance to cover their final expenses and outstanding debts, others might need life insurance to ensure that the living expenses of their beneficiaries are well protected.
There is no ‘one-size-fits-all’ amount for all situations. It all depends on what you need. However, whichever coverage you get, you would want one that has a large death benefit that’s enough to cover the bills and expenses your family would encounter if you are gone.
If you are the primary income earner of your household, you would need a significant death benefit to replace the income from your job, cover your mortgage or rent, pay off debt and save for your children’s college.
If you are a part-time worker or stay-at-home parent, you might need a large death benefit to cover childcare expenses, household duties, and your final expenses.
You would need a death benefit that is large enough to cover all the extra costs which your family would have when you pass away. So, the more dependents you have and the younger they are, the more life insurance you would need.
Suppose you only want to ensure your beneficiaries are looked after, have some philanthropic and charitable goals, or a family situation or complex business requiring more funds.
In that case, an advisor can help you with a needs analysis questionnaire to determine the appropriate amount you might need for your life insurance.
5 Methods To Calculate How Much Life Insurance You Need
There are some rules of thumb that you can use to determine how much life insurance you will need.
While no one knows what the future holds, nor can we foresee every possible expense your family might encounter when you pass away, we can use a few straightforward methodologies to estimate the amount of coverage you will need.
1. DIME
The DIME formula is a suitable method for calculating your life insurance. Among all the methods, DIME is more comprehensive.
This formula ensures that your life insurance covers all the essential areas of your life.
- Debt: How much debt would you leave behind for your family? Look at all your debts aside from your mortgage. These include credit card debt, car loans, student loans, or lines of credit that are not written off at your death. Total all your current debts, future debts you intend to enter, and any obligations you won’t be around for, like funeral costs.
- Income: How much income do you make in a year? How many years would your family depend on your income before they can fend for themselves? Consider how long they would need your financial support. A good starting point is determining how many years until your youngest kid graduates college.
- Mortgage: How much money do you owe on your mortgage? Your mortgage debt doesn’t automatically go away because you died. Your family would be faced with having to make your mortgage payments or forfeit the house. So, factor in your mortgage balance in your life insurance. If your family outgrows the home, you can add enough to cover the significant renovation costs.
- Education: How much money will it cost to send your kids to college in 20 years? Suppose they want to do their Masters, Ph.D., or college diploma, or they want to study abroad, there should be enough to cover all these costs.
2. Multiply Your Income By 10
The Canadian Government recommends the purchase of life insurance coverage that is usually ten times your annual income.
It is one of the simplest methods for calculating how much life insurance you will need. However, it ignores your family’s unique situations. It doesn’t factor in your savings and doesn’t comprehensively look at your family’s needs.
The number of children you have, your assets, and your debts are not considered when you use this method for calculating your life insurance coverage amount.
3. Multiply Your Income by Ten and Add College Costs per Child
If you currently have or intend to have children in the future, you should factor in the tuition costs of your children’s college.
This method is also more straightforward and allows you to plan for your children’s college. How much money should you add for your children’s tuition? You might want to consider between $100,000 and $150,000 for each child.
This method is the same as the ’10 times income’ method. It doesn’t consider your family’s situations in detail, like your existing assets or unpaid debts.
4. Human Life Estimation Method
Another simple method you can use to determine how much life insurance you will need is by using the human life value philosophy.
You can multiply your income by a variable based on factors like age, projected working years, occupation, and current benefits.
You can multiply your income by 30 if you are between the ages of 18 and 40, by 20 if you are between ages 41 and 50, by 15 if you are between ages 51 and 60, and by 10 if you are between ages 61 and 65.
What Factors Determines The Amount Of Life Insurance You Need?
Life insurance is something you buy for others and not for yourself. It helps your family and dependents cover day-to-day expenses if your pass away.
It would help to consider a few factors when calculating how much life insurance you need.
- Who relies on you financially: Think about how many persons depend on you and how long you would need to support each of them financially. Think about your kids; how many do you have or intend to have? How old is your youngest? Would they attend college or university? What about your spouse? How would they survive financially without you? The more dependents you have, the more life insurance coverage you would need.
- Your debts: If you have mortgage, car loans, student loans, or credit card bills, how would your spouse and dependents ultimately settle all your debts? Your life insurance coverage should also be determined by how many debts you have to pay off. You would not want your family adding the stress of mortgage payment to the grief they would face after you pass away.
- Your annual income: It is recommended that your family and beneficiary get ten times your yearly income. If you are the primary income earner of your family, you would want to ensure that they are looked after many years after you are gone. Your life insurance coverage should be able to cover your final expenses and everyday living expenses your family would face.
- Your funeral expenses: When it comes to final expenses, personal preferences play a significant role. A small coverage would do if you want a small service and get cremated. However, if you want a grand event with many people, you should consider having extensive coverage.
Final Thoughts on How Much Life Insurance Do I Need?
Life insurance protects those who depend on you for financial support. You should consider their needs and establish a financial plan to ensure they are looked after if you pass away.
For everyone asking How much life insurance coverage do I need, this article will guide you in calculating the amount of life insurance coverage you need.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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