This seems obvious when clearly stated, but it’s not necessarily. For example, is covering your mortgage with life insurance a loss? No it’s not – your mortgage isn’t lost on your death.
Families are generally trying to ensure that their family’s lifestyle is not lost in the event of a premature death. But lifestyle isn’t directly a financial loss, so we need to dig deeper. For most of us, our lifestyle is dictated by our income – we earn a pay cheque which pays the bills, mortgages, savings, etc. Our income drives our lifestyle. And in the event of our death, the financial loss is our income. So it’s our income that we want to insure – replace our pay cheque for our family in the event of our death, they can continue to spend it as before and that will maintain their lifestyle; neither leaving them richer than they were before, nor poorer.
Life insurance doesn’t pay a stream of replacement income. Instead, we need to determine how much upfront life insurance we need so that our family can produce a replacement income stream from the life insurance payment. i.e. the insurance company provides a lump sum cheque upon our death, our family uses this across the years to draw your replacement income from. At the end of the time frame, the entire amount of the life insurance benefit is completely spent.
The calculator on The Term Guy’s home page performs this calculation for you. It tells you how much upfront life insurance you need in order to recreate a stream of income over a period of years, with nothing left over at the end of the time period.
When using the calculator, you’ll need to consider:
The calculator is intended to provide ranges rather than an exact number because we can’t know an exact number beforehand. Therefore you should run multiple scenarios to get a sense of where you should be. Run scenarios with 60% and 80% of income. Run time frames until the kids are 20 to 25, and to retirement.
In the event of a spouse with no income, there are two ways to estimate the amount of life insurance they should consider.
1) Assume replacement costs of their household contributions (child care, etc.) until the kids are self-sufficient. If you assume a time range of 15-20 years and a replacement cost of $15,000-$25,000 then using the calculator will result in a range of about $250,000 to $500,000. So, choose either $250,000 or $500,000.
2) Assume that each person’s ‘life’ is worth the same, and insure both spouses for the amount calculated for the spouse with income. This isn’t entirely an unbiased calculation, it’s heavily dependent on your viewpoint of the value of life insurance.
There are two financial considerations with children. First, however, astute readers may have heard that since children don’t produce an income, there’s no need for life insurance. This is incorrect in practice.
The financial loss, and in particular loss of income with children, is the loss of the parent’s income. If you are considering insurance for your children, we recommend an amount in the range of 6 months to 1 year of the parent’s combined yearly income.
Secondly, some Canadians prefer to insure their children in the event that the children become uninsurable in the future and are then unable to secure a policy when they do need to protect their income. The solution is to put a policy in place when they’re young – so if they do become uninsurable the children already have a policy that can’t be revoked.
Policies on children have special considerations (lifetime coverage, coverage increasing over time) so a whole life policy is generally recommended. These policies are not generally available online however if you wish you can contact our office for a quote.
The Term Guy recognizes that insurance on children is a deeply personal choice and advises you that many Canadians choose to place insurance on their children, and many Canadians prefer not to discuss the subject at all.
When purchasing term life insurance for family needs, the unstated assumption is that at the end of the term you have enough retirement savings and no longer need life insurance. This is mostly true, but not necessarily completely so. There are three immediate reasons why a retiree may consider an amount of life insurance:
1) Reduction in pension benefits: Upon the death of the first spouse, pensions often offer a reduced payment until the death of their spouse. The financial loss is the reduction in income for the surviving spouse. You may consider estimating this amount and insuring it.
2) Additional final expense costs: Burials and related costs can be anywhere in the range of $10,000-$25,000. This is also an insurable amount. And because life insurance is typically paid within days, it’s also likely to be the fastest way to have immediate funds on hand in the event of your death.
3) Estate creation: Some Canadians would like to guarantee payment to their children, grandchildren, or other family members. This is not a financial loss and thus the purchase of life insurance for this purpose should be looked at more as the cost of guaranteeing the creation of these funds to your family.
The total of these three items will give you the amount of coverage you should consider for final expenses.
In the event that no dependants are planned in the immediate future, you should have life insurance sufficient to replace the amount of your income that your spouse depends upon to maintain their lifestyle. You can use the calculator on our homepage to run those numbers.
In this case, however, there’s a reasonable proxy you can use that’s far easier to calculate. We assume that your spouse can survive if any outstanding debts are cleared up, and any mortgage is paid off. Therefore, an estimate for the amount of coverage you should consider would be simply the amount of any remaining debt that you have, plus the outstanding balance on any mortgage.
In the event that dependants are planned in the near future, The Term Guy recommends that you assume that they’re there already and follow the coverage calculation listed in the ‘Life Insurance for Families’ section above. Otherwise, you’ll be looking at purchasing one policy now, and then likely needing an additional policy in the next year or two. Purchasing the family amount now will leave you a bit overinsured temporarily, but that’s better than waiting and finding out that you’ve become uninsurable in the short term, or that premiums have increased.
225 Eby Crescent
New Hamburg, Ontario
N3A 1Y9
+1(866)-799-1499
Policies are underwritten by Wawanesa Life Insurance, a Canadian life insurance company rated A Excellent.
The Term Guy is a licensed life insurance agency serving residents of Ontario (Lic #37992M), British Columbia (Lic. #LIC-2021-0030559-R02), and Alberta (Lic. #5-11247944-2021).