Canada Insurance Broker | Understanding Your Life Insurance Needs

If youre in the market to purchase life insurance, one of the initial questions you ask yourself is how much is this going to cost. Well, that depends on some important variables:

How much life insurance do you need
How old are you older is more expensive
Do you smoke smokers have to pay more: a lifestyle choice that keeps on costing money
Health status - Excellent, average, no so good cheaper, standard price, extra (rated) premium.

Lets pay attention to on the first point, How much life insurance you need. The other factors are what they are, and we arent going to change them over night. When completing a basic life insurance needs analysis a good Life Insurance Broker will guide you through a process of finding out your risk exposure based on your situation and your wishes. This calculation, using simple math, shows you how much tax free income your family would need if you die tomorrow.

Step 1 What do you have in cashable assets?

First we have to look at the assets you have on hand. This includes any existing life insurance, cash savings or cashable assets, equity in real estate that could be liquidated, etc. It is essential to keep in mind that not ALL your assets are liquid; and even if they are, not all of your assets should be cashed in when an emergency arises. Consider these points before planning on liquidating assets:
If you have tax sheltered retirement savings like an RRSP or TFSA in Canada, would you want that money liquidated at death and be made use in a family emergency? Your spouse is planning on using that money for his/her retirement, and if cashed in there are immediate taxes owning on your whole savings plan. Taxes could eat away 25 35% of your savings! Its best to insure your retirement savings for your spouse by buying extra life insurance - its a much cheaper option if emergency arises.

Or perhaps you're planning to get equity out of your house if there's an emergency. This would mean selling or refinancing your house. If you sell, where will your family live? Are you going to let them just rent or live in a much smaller home. And if they had to refinance that means leaving your family with more debt after you passed away. Staying in your family home indicates protection for your spouse and children. Keep them there dont force them to move homes and uproot their life if you pass away.

What will you do with business assets and investment real estate? If your spouse has no involvement in the business or doesnt want to run a rental property, then you need to plan on selling them before you passed away. Things can change swiftly and Alberta could see a major housing correction (price drop) or local business activity could dry up. What are your assets be worth then? Use a reasonable, even pessimistic number when valuing your business and real estate investments, and take transaction costs into consideration which your survivors will have to pay.

Do you have cash savings put aside to achieve a certain goal? can you still make that dream a reality for your family even if youre gone? Is this a dream only if you are alive, or is it something worth insuring.

Step 2 Immediate cash needs

Next you need to determine how much cash your family would need over the first 6 to 12 months to pay debts and final expenses. This is your Immediate Cash Needs, and the following needs to be considered:
Final expenses includes funeral costs, legal and executor fees, and other closing costs for your estate. Most families have minimal final expenses, and $15 $20 thousand should be alright. If you are high net worth, plan for 3-4% of your total assets being paid out in final expenses and probate fees.

Paying off your mortgage make sure that large debts like your mortgage are paid off. Have enough life insurance in so that your spouse can decide whether to pay off the mortgage or just invest the money. Life insurance, not like mortgage insurance, gives the tax free cash to your spouse to use it as they wish. If interest rates are higher than your mortgage rate it would be wise to invest the money and keep paying down the mortgage. When renewal time comes, and the bank wants to increase your rates, pay off your mortgage then.

Other outstanding loans and debts Have the right life insurance to pay off lines of credit, business loans, student loans and credit cards so your family won't have to worry about it.

Provide an education plan for children Its challenging to save extra money each month, but you know its necessary. And if you can't afford to save the money towards an education plan, wouldnt you like to know that when you die you could leave your children the gift of a college/university education? Plan on adding at least $40,000 per child to your life insurance policy for education funding.

The cost of a care-giver/stay at home parent if one of the parents stays at home to raise children and manage the home, there is a high cost to replace this unpaid work being done in the home. The cost to bring in a care-giver/home worker or live in nanny is quite big $1,500 $2,500 per month. Could the income of the spouse support this and still do his/her job? The cost to replace the unpaid work of a stay at home parent could run as big as $250,000 spread over 10 years. So, stay at home parents need life insurance too.

Step 3 Replacing lost income

What is your most valuable asset? Will that be your house?. It could be worth $300, $400, $500 thousand dollars or more. Even while paying down your mortgage, the equity in your home and its full value makes it looks like the biggest asset you own. Actually, the most valuable thing you have is YOU. Imagine yourself as an economic engine supplying money for your family. You can work, earn an income, and produce money for years and years. If you die tomorrow, what will be the financial loss to your family? Here is an example of long-term income loss:

[If you are40 years old, making $75,000 annually, and you retired at age 65, you will earn $1,875,000 over the next 25 years. But wait, theres more. Inflation, salary increases and investment returns will make your income grow even more. If your salary went up by 2% per year for the rest of your career (keeping up with inflation) and you could get a 5% rate of retunr on money over the next 25 years, how much capital would you need now to replace the lost $75,000 of annual income? Answer: $1,280,000 of tax free life insurance benefit would replace your lost income over the next 25 years.]

A full Life Insurance Needs Analysis is a little more complex than that, as it accounts for more than income replacement it should structure your wishes. Do you want to replace your entire lifes income for your spouse? Would you want to replace income until the children are grown and then your spouse become financially independent and go back to work? These are the questions you need to walk through with your life insurance advisor when doing the life insurance needs analysis.

Step 4 Final Result: Your Life Insurance Needs

Final result of your Financial Needs Analysis is how much life insurance you need. It is a quick plus minus calculation.
Immediate Cash Needs + Replacing Lost Income What You Have Now = Total Life Insurance Needs

This equals your life insurance needs and your advisor should be encouraging you buy at least this amount of coverage. Less would mean you are under-insured, and then the advisor perform their job. More life insurance and you will be over insured and paying premiums for insurance that is not necessary.

Be sure to ask your life insurance advisor to execute a financial needs analysis with you. If they cant, dont know how, or want to just pick an amount of insurance out of the air, consider another advisor.