Peter Boys, Boys Financial Services

How Much Life Insurance Do You Need?

life insurance

When trying to decide how much life insurance you need, there are many variables to consider including your age, health and lifestyle issues that could affect your premium.

What the insurance is needed for affects what insurance product type is suitable. Is it to cover debt, replace lost future income earning ability or to cover post secondary education costs for your children? Or is it to conserve the value of your estate that would be lost to outstanding debt or taxes, or to equalize the estate for businesses or farms, or compensate children who won’t be involved in the family business?

There are some rules of thumb for determining how much you may need. One is 10 times your annual salary. Another is equal to the total of your debt, funeral costs, and your children’s post-secondary education, etc. The sad reality is that most Canadians are underinsured or have no life insurance at all.

Consider a 30 year old couple with three children with a $565,000 total debt between a $450,000 mortgage, a $40,000 vehicle loan, a $65,000 RV loan and a credit card balance of $10,000.

Based on standard rates, they can have $565,000 of level cost to age 65 term coverage with child riders of $10,000 each for $113 a month. If they add extra coverage to replace the income earning ability on death of either one of them for 5 years, plus allowed for any post-secondary education costs, it’s easy to justify having $1 million of coverage for each parent for $185 a month premium cost. That is probably less than the cost to insure their vehicles.

Canadians tend to underestimate their lifetime income earning potential. It’s easy to focus on mortgage and other debts, rather than the amount of money it takes to provide income for the survivor to live on and raise the children. Or how much to cover post-secondary education costs for your children! An important feature that most reputable life companies allow is the option to convert some or all of the term plan to permanent coverage without further medical underwriting. This could be a huge benefit down the road.

Young professionals, small business owners and farmers who are incorporated should consider at least $2 million of term coverage as a starting point. If you are working in an industry that is growing, consider buying a business value increase rider for guaranteed insurability down the road. This is a relatively cheap add-on, and invaluable for someone who may need more coverage down the road but risk becoming uninsurable.

Life insurance premiums go up as we age, and future health issues can increase the cost or result in being declined for coverage. The other thing to remember with life insurance proceeds is that they are paid out to the beneficiaries tax-free. This is a huge benefit to the survivors left behind on the death of a loved one or business partner. I can attest to this when a partner in our farm equipment business at Grande Prairie was killed in a plane crash. We had a buy/sell agreement in place funded with life insurance. The $1 million of insurance proceeds allowed us to buy back his wife’s shares at fair market value, pay off our bank debt, and carry on our business with no loss of franchises, suppliers or bank support!
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