The results of a recent survey show that nearly one-third of Canadians (31 per cent) do not have any kind of life insurance policy. And, less than half of all Canadians (42 per cent) have plans to purchase life insurance within the next year.
Nobody wants to think about what will happen to their dependents after they pass away. But, it's important to consider these things now -- and have a plan in place -- so that your loved ones are cared for after you're gone.
If you've never thought about life insurance, you probably have some questions.
What kind of life insurance should I buy? How much life insurance is enough? How do I make sure you (and your family) have the coverage you need?
Read on to get answers to all these questions (and more) and find out how much coverage you should sign up for.
Why Do You Need Life Insurance?
Because they are not legally required to purchase life insurance, a lot of people are under the impression that it's not a necessity. In reality, though, a life insurance policy is one of the most important investments you can make.
There are lots of reasons to invest in life insurance, including the following:
- Replace income for your dependents (your spouse, children, etc.)
- Cover the cost of final expenses (funeral, burial, probate, debts, medical bills, etc.)
- Create an inheritance for your children and other heirs
- Make substantial contributions to your favourite charity
A life insurance policy can also act as an investment account and provide you with an opportunity to build up additional savings that can be used later in your life.
Types of Life Insurance
Okay, you're convinced that life insurance is a good idea. Which type of life insurance should you purchase, though?
There are two main types of life insurance: term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance protects you and your dependents for a specific number of years. Most term life insurance policies last for 30 years, but you can also purchase shorter term policies (some last for just five years).
Term life insurance is usually the less expensive option. But, if you decide to renew the policy once the term has ended, you'll likely have to pay more money than you did initially.
Permanent Life Insurance
This type of life insurance protects you and your dependents for the duration of your life (i.e., permanently). The policy will never expire, assuming you keep up with your premium payments.
Permanent life insurance is more expensive than term life insurance, but there are also benefits to choosing this option. For example, many permanent life insurance policies also include an investment component.
If you choose a policy that has this component, a portion of the premium you pay each month will go into a savings account. After a certain period of time, you can withdraw against the money you've saved up.
Even if you decide to cancel your policy, you still receive these investment funds.
How Much Life Insurance Is Enough?
In addition to choosing the type of life insurance policy you want, you'll also need to decide on the death benefit amount. This is the amount of money that your policy will be worth.
There are a lot of factors you'll need to take into account when deciding how much life insurance to purchase, including the following:
Start by Multiplying Your Income by 10
If you have no idea where to begin when it comes to calculating the amount of coverage you need, a good starting point is to multiply your income by 10. So, if you currently earn $60,000 per year, you would multiply by ten and get a $600,000 policy.
Most financial experts do not recommend this as the only calculation you do when determining the amount of life insurance you should buy. It doesn't take into account specific details like your family's needs, your current savings, or fluctuating interest rates.
This equation can still help you begin the process of choosing a death benefit amount, though.
Add Money for College
If you have children, or if you plan to have children in the future, make sure you're including money for their college education when you calculate your death benefit amount.
Of course, the cost of education varies from school to school. But, a good rule of thumb is to plan for an extra $100,000 per child.
This might not cover all of their college education, but it will at least cover a significant portion of it.
Consider Your Debt
Be sure to take your current debt into account, too.
Do you have student loans? A mortgage? Auto loans?
Factor those debts into the equation and make sure you leave enough money behind to pay them off.
Consider Your Monthly Expenses
How much money does your family spend each month to cover the necessities? This includes things like your mortgage payment, utility bills, and car payment.
If you are the primary earner in your family, make sure you're leaving enough money behind for your dependents to continue living the same way they lived while you were alive.
Think About Your Monthly Savings
How much money do you set aside in savings each month? If you don't have a lot of debt, live within your means, and save a decent amount each month, you may be able to purchase a less expensive life insurance policy.
Err on the Side of More Coverage
Of course, just because you can spend less, that doesn't necessarily mean you should. Generally speaking, it's best to err on the side of more coverage than less.
Remember, you're planning for the future here.
Your income is likely to increase, which means your expenses will likely increase, too. It never hurts to have a bit of a cushion, especially when it comes to making sure your spouse and children are taken care of.
Get Life Insurance Today
You've now got a clearer answer to the question, "how much life insurance is enough?"
So, do you know what kind of life insurance policy you're going to purchase? Or, do you still have questions about which type of policy is right for you?
Whether you have questions about life insurance or if you want to invest today, we can help at Insurdinary.
Contact us today to learn more about the different types of insurance we offer or to get a free quote on a policy that interests you!