How Much Term Life Insurance Do You Need?
You’re probably assuming that I know the answer to the post title, but unfortunately I don’t have an exact answer. Like most personal finance issues, it really depends on your current situation.
I believe that life insurance is a means of protection, not a means of making someone rich. To clarify, term life (not universal life insurance) should be used to protect the people dependent on your cash flow. On top of that, I feel that people should work towards building their asset base so that they eventually won’t need insurance. That’s why term life works so well. It covers you when you NEED the insurance while you’re young, but 20 years down the road hopefully your debt will be low along with enough assets to cover the needs of your dependents (if you have any at this point).
Personally, with both my wife and I working with decent salaries, we don’t “depend” on each other for cash flow. If one of us were to pass away the only real financial pain we would face would be our biggest debt, our mortgage. So in my specific situation, I would be comfortable with getting enough term insurance to cover the mortgage.
When we do have children, the whole insurance picture changes drastically. Now, not only do we need enough term life to cover our debts, but now we need to replace income to raise a child in case one of us passed away. So how much do we need to cover a child? Realistically, assuming that the insurance covers all debts, one of us should have no problem raising a child (financially speaking). However, what about larger future purchases like college/university or the cost of a nanny care to help out with single parenthood? Perhaps enough insurance (on top of debt payment) to put a lump sum into a RESP (you can do this with the new RESP rules), and a bit extra to cover other child are expenses.
In conclusion, life insurance is meant to help reduce the financial burden faced by the beneficiary. With that in mind, you’ll need a lot less life insurance than what most insurance reps will recommend. However, every situation is different. If you have dependents, sit down with your spouse and have a chat about the worst case scenarios. How much would you need to minimize the financial burden in case one spouse passed away?
If you want to get some comparison quotes on term life and auto insurance, check out Kanetix. I’m all about comparison shopping, and Kanetix provides a free insurance comparison service for both Canadians and Americans.
What are your thoughts on the amount of life insurance needed?