How do you calculate how much life insurance you should have?

When you hear the words “life insurance” what immediately comes to mind? Is it that same warm feeling you get if you think about laying on a beach in Fiji with a cold drink in your hand? Or how about the thought of watching your favourite movie on a rainy day while cuddled up with a golden retriever named Charlie..

No? Me neither…

The truth is, life insurance isn’t that exciting to think about, or talk about. In fact, I could make the argument that many people get the same feeling when they think about life insurance, than if they thought about someone scratching their nails down a chalk board (I’m so sorry, I just winced as well).

That being said, I’m sure many would agree that life insurance plays a crucial role in your overall financial security plan when considering your family or estate.

"Fun is like life insurance; the older you get, the more it costs" - Kin Hubbard

Now that we have established that life insurance is important, the question now becomes how much should you have? The answer to this question is where most people get stuck. It’s common that people will turn to friends, family or Google to help them figure out how much life insurance they should have. These may seem like great sources of information, but they could also leave you misled and confused.

Asking friends how much life insurance they have may not make sense for you, as their situation is different than yours, even if it seems similar on the surface.

Next, you might find yourself asking a family member what has worked for them. This could lead to the discovery that your grandparents had $50,000 of life insurance to protect the family’s needs and things works out well for them. Well, I’m sure that was sufficient for them in a time where they could also take the whole family out for dinner with a $20 bill and use the change to fill up the car with gas. The time value of money and inflation play a huge part in eroding the purchasing power of a dollar, so you’ll want to keep this in mind when comparing to values of the past.

Finally, you might resort to the internet to provide you with the life insurance wisdom you seek. However, after an hour of searching and hundreds of conflicting articles later, you might be left frustrated and even more confused than when you started. It’s at this point that many people are tempted to throw in the towel and put life insurance on the back burner. Can you blame them?

So, how on earth are you supposed to find out how much life insurance is right for you?! No need to panic, I have a very simple formula to solve this mystery.

When it comes to life insurance, your need is going to be specific to you and your unique situation. I like to break down life insurance needs by levels of priority.

The first level to calculate a life insurance need should be made up of the financial liabilities that you wouldn’t want a family member to deal with, should you pass away. Some examples of this would be a mortgage, line of credit, student loans, final expenses etc. In my opinion, these liabilities should make up the bare minimum of your life insurance coverage.

Secondly, let’s take a look at income replacement, a common priority for many people. The loss of a household income would certainly create some financial unrest, but if that lost income was the main source in the household, these losses could be detrimental. A way you could safeguard against these financial impacts would be to factor in an amount of lost future income, should you or your spouse pass away. This could be calculated as either a predetermined amount or as income replacement until a set point in time (until the kids reach a certain age as an example). You need to remember that all of your future financial goals are based on the assumption that you remain healthy, alive and working all the way through your life. Unforeseen events, such as a sudden loss of income or a sudden death, would definitely throw a major wrench into any future plans you and your family might have.

Another factor to consider for life insurance coverage, is an amount of money you would like given as a gift to a special family member(s), or charity. Again, this is going to be based on your own personal concerns and priorities, but if it is important enough to you, you should think about adding that to your life insurance plan.

One last consideration regarding your life insurance coverage, is that it isn’t like the “Showtime Rotisserie” where you just “set it and forget it” (Google this, you'll remember this catchy infomercial...). It would be wise to reassess your life insurance coverage from time to time, but especially when major life events occur. Some common examples of this would be if you; got married, had children, bought a home, changed jobs or moved. Having your life insurance plan and your life insurance needs in sync will result in peace of mind and a confidence that your plan will be there for you when you need it the most.

So, if you’d like to learn more about how much life insurance coverage is right for you and your unique situation, reach out and I’d love to see how I can be a resource for you!

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519-573-3981