Life insurance Needs Analysis

Life insurance can be complicated at times; thankfully, performing a life insurance needs analysis is not.  If you are not sure how much life insurance coverage you need or whether you even need life insurance, this post is for you.  

Do I need life insurance?

Whether you need life insurance or not depends on your situation, financial obligations, and personal preferences.  If you answer yes to any of the following questions, you probably need life insurance.

• Do you have someone in your life who depends on you for their financial well-being?  
• Do you have a co-signer on a loan?  
• Is it important for you that your loved ones do not have to bear the cost of your funeral and end-of-life medical bills?  
• Do you want to leave an inheritance for your loved ones?  
• Do you want to donate money to a charitable cause after death?  

How long should my policy be?  

Life insurance policies are either term or permanent. Term life policies come with an end date. The end date could be one, five, 10, 15, 20, 30, or 35 years, or until you reach a certain age, for example, 65.  

Term insurance is a solid option for income replacement and debt management. That is because it provides life insurance coverage only for as long as you need. Plus, it is much cheaper than permanent insurance.  

How long should your term life policy be?

If you want to use a term life policy to replace your income after you are  gone, your policy should last as long as your family needs this protection. For example, if your family will need income replacement until your children complete college, which is roughly 18 years away, you should opt for a 20-year term life plan.  

If you want insurance primarily to help your family pay off your debts, your policy’s term should match the term of your biggest loan, which for most people is the mortgage.  

Permanent life insurance, on the other hand, provides protection for your entire life. The coverage ends with your death or when you cancel the policy. Although expensive, a permanent life policy may make sense for someone who has a lifelong dependant, or wants to leave a legacy.  

How much coverage do you need?

One-size-fits-all does not work in life insurance because every applicant has unique needs. How much insurance you need depends largely on why you are buying coverage in the first place.  

Here are some general guidelines for different scenarios to help you better understand your coverage needs:  

You are buying life insurance for income replacement

Life insurance cannot replace you, but it can replace all or part of your annual income. If you want insurance for income replacement for your spouse, you can calculate the amount of coverage you should buy using this simple formula:  

Life insurance amount = your annual net income x number of years you want to provide income replacement.

You are buying insurance for income replacement and debt management

Some of your debts — for example the mortgage — do not go with you to the grave, nor are they forgiven. While your partner or children will not inherit your debt after you pass on, lenders can recover the owed amount from your estate. As a result, your loved ones will inherit less than what you intend them to.

Along with income replacement, life insurance is an excellent option for debt management. Your spouse can use the payout to cover daily living expenses, and take care of major future expenses, like college fees.  

If you have debts that will eat into your loved ones’ inheritance after death, consider using insurance for both income replacement and debt management. You can use the following formula to figure out how much insurance you should buy:

Life insurance amount = (Your annual net income x number of years your family will need financial support) + (Your total debt).

You are buying life insurance to take care of a lifelong dependant

Do you have a special needs child whose future you want to secure? Are you responsible for the financial well-being of a parent or close relative?  

If you have a lifelong dependant, proceeds from your policy can ensure they are able to live comfortably after you are no longer there to take care of them. To understand how much insurance you need, first figure out how much money you spend on their care each year. Then, multiply this figure with the number of years they are likely to need support.  

You want to leave a legacy

Life insurance is a great option for leaving an inheritance for your children and grandchildren. That is because payouts bypass the estate and probate process. Plus, they are tax-free. Therefore, if you purchase a policy with a $500,000 death benefit, for example, your heir will receive the exact amount.  

If you want to use insurance for passing your money to the next generation, first decide how much inheritance you want to leave behind. Then take out a permanent life policy, name all your heirs as beneficiaries, and specify how much money you want each one of them to receive after your death.  

You want to cover funeral expenses

People who have no dependants may want to consider a small insurance policy to cover their funeral costs and final medical bills. A permanent plan with a $25,000 or $50,000 payout is likely to be adequate for this.    

Do I need critical illness insurance if I have life insurance?

Critical illness insurance and life insurance cover different things. Critical illness insurance can help replace income lost due to inability to work as well as medical expenses. Life insurance provides your family with a lump sum of money when you pass. Depending on the person, you made need both critical illness insurance and life insurance, one of the two, or neither.

What should I consider while buying life insurance?

Some important pointers to consider before you start shopping for life insurance include:  

• Each insurer uses a unique underwriting process to set your premiums. Therefore, always compare quotes before you buy a policy, as this is the only way to ensure you are getting the best price.  
• Insurance companies look at various factors before deciding your premium rate. Some of these factors, for example smoking status, are under your control, while some others are not. By working on your health, you may be able to lower the cost of life insurance.  

• Term  insurance can be six to 10 times more affordable than permanent  insurance, but it comes with an expiry date.  
• Take a comprehensive review of your family’s needs to ensure you do not leave them with too little money to live on.

Conclusion

Performing a life insurance analysis is easier than you may think. While calculating your insurance needs down to the penny is hard, you can make a fair estimate by adding all financial needs and obligations. Need more help? A Dundas Life expert can assess your situation and recommend the best coverage for you.