Understanding the basics of life insurance and how to calculate how much you need can help you when making these financial decisions for your family's future and their unique needs.
We hear all the time that life insurance is important and should be considered when planning our family’s financial future but, how do we know how much is enough? Understanding the different types of life insurance and itemizing what’s important to your family will help determine what coverage would be best for your needs. Here’s what you need to know.
Life Insurance Basics
A life insurance policy pays a tax-free, lump-sum death benefit to your beneficiaries when you pass away. It is a way to help provide for your family financially if you are no longer around to do so.
You can arrange life insurance through an agent or broker, or in some cases through a group plan available through your employer or other organization.
Life insurance comes in several forms:
1. Term Life Insurance offers a simple insurance solution that protects your family for a set period of time. If you pass away during this time, your insurance policy pays your beneficiaries, tax-free.
2. Permanent Life Insurance gives you coverage for life and typically provides a death benefit with a savings/investment component. Two primary types of permanent life insurance are Universal Life Insurance and Whole Life Insurance.
3. Personal Accident Insurance is an affordable form of life insurance that protects your family if you pass away from an injury due to a sudden accident.
When you’re trying to figure out which type of life insurance you need, consider your current and future financial obligations. If you’re single with no children, your financial obligations might look quite different than a married couple with a mortgage, car payments and two small children.
How Much Life Insurance Do I Need?
There are many rules of thumb about how much life insurance is the right amount, but generally the amount depends on what you want it to cover. Putting pen to paper or using a handy tool can help you calculate how much life insurance you will need. Some helpful things to consider can include:
- Providing for dependents until they’re finished post-secondary education.
- Paying for your children’s post-secondary education. (Average tuition for an undergraduate program in 2018/2019 is $6838).
- Paying for a loved one’s nursing home expenses. These costs vary by province and can range anywhere from $1,475 to $6,000 per month.
- Providing financial support for a spouse who is a home maker or stay at home parent.
- Paying off your mortgage or other outstanding loans or debts.
- Paying for funeral and burial costs which typically range from $7,000 – $15,000.
Once you’ve decided what items your life insurance policy should cover, think about your current annual income. If something were to happen to you, how many years of your current salary would your loved ones require to safely provide for their needs? That totaled amount should equal or be close to the amount you calculated that your life insurance policy should cover.
Do I Have Enough Life Insurance?
Once you’ve uncovered how much insurance your family will need, you’ll need to validate how much coverage you have already through work or a group plan to see if there are any gaps.
Make note of the type and amount of coverage you have through your employer-provided group life insurance. A group life term insurance policy might cover just two or three times your annual salary. Depending on your goals, you might want to invest in additional life insurance of your own if the existing amount is not sufficient for your needs. Check the fine print in your employment benefits package, or contact your human resources department to help you find how much life insurance you have through work. If you switch jobs, your group policy will most likely end, so always stay up to date with your coverage. Consider taking out your own personal policy outside of your employer’s coverage to avoid ever being left without a policy.
Forecasting the future costs of providing for your family can be difficult on your own, but understanding these key points can help you feel more confident. If you need help estimating how much life insurance you might need, meet with an Insurance Advisor.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.