How Much Life Insurance Should I Own?

I was building a deck a few years back and I didn’t know what type of wood to use.  When I asked my family and friends, everyone seemed to have their own answer.  One friend suggested spruce, another recommended pressure treated lumber, another proposed untreated lumber, and yet another believed cedar to be the best choice; if I could afford it. I wasn’t sure which wood to settle on until I asked a family member; who in turn asked me a question first. He asked: “how long do you want the deck to last?” I guess the answer really depended on what my own objective was.

When buying life insurance, one must ask themselves similar questions; such as:

• Why do I want the coverage?
• How long will I need the insurance?
• Is my need short term or permanent?
• Will my need diminish with time?

And the most important question: How much coverage do I need to accomplish my objective?

By asking these questions, the answers will come to the surface; and speaking with an advisor will help uncover some issues you may not have thought of on your own.

For example:

• Can I split my beneficiaries?
• Should I name my estate as beneficiary?
• What is the advantage of naming a secondary beneficiary?
• What about increasing or decreasing coverage in the future?
• Can I keep my coverage even after my mortgage is paid off?

The amount of life insurance you need is determined by your personal objective. Buying insurance to cover a specific item, such as a mortgage is easy. If the mortgage is $150,000 and you want the full amount of your mortgage paid off at your death, then you will need $150,000 worth of coverage. However, if you have a more complex situation; you may need coverage that will generate a full replacement of your income, which will last until the children are finished school and then, a reduced amount of coverage until your widow/er has survived a further number of years. If the death benefit is to be indexed for inflation, or if taxes are to be considered, your requirements will again be different.

For example if you were earning $100,000 per year, and your objective after death was to provide $50,000 per year to your family, indexed with 3% inflation and receive a 6% interest growth, and if your tax rate were 38%, than a $750,000 death benefit  would last for about 16 years.

		Prepared for:	Client Name
		Current Income	$100,000
		% target	50%
		Actual Target
		Existing Insurance	$0
		New Insurance	$750,000
		Inflation	3%
	Opening		6%	38%	Year End
Years	Balance	Income	interest	Income Tax	Balance
1	$750,000	$50,000	$42,000	$15,960	$726,040
2	$726,040	$51,500	$40,472	$15,380	$699,633
3	$699,633	$53,045	$38,795	$14,742	$670,641
4	$670,641	$54,636	$36,960	$14,045	$638,920
5	$638,920	$56,275	$34,959	$13,284	$604,319
6	$604,319	$57,964	$32,781	$12,457	$566,680
7	$566,680	$59,703	$30,419	$11,559	$525,837
8	$525,837	$61,494	$27,861	$10,587	$481,616
9	$481,616	$63,339	$25,097	$9,537	$433,838
10	$433,838	$65,239	$22,116	$8,404	$382,311
11	$382,311	$67,196	$18,907	$7,185	$326,838
12	$326,838	$69,212	$15,458	$5,874	$267,210
13	$267,210	$71,288	$11,755	$4,467	$203,210
14	$203,210	$73,427	$7,787	$2,959	$134,611
15	$134,611	$75,629	$3,539	$1,345	$61,176
16	$61,176	$77,898	($1,003)	($381)	($17,345)

If you are in Nova Scotia, and wish to receive some insurance advice, please contact:

Corry Collins CLU CHFC CFS.

902-444-7000

corry@maritimewealth.com