As financial advisors, if we had a magic wand we could wave it over a family to provide the answer of
how much life insurance a family should own, when to buy it, and what
type of coverage is the best; in reality, we don’t have such a wand, but we do
have the answers to many questions.
Life insurance is not as subjective as we think. We do know
the answers to many of the questions already. We don’t know when we are going
to die, but we do know eventually we will all pass away. In fact, this is what
makes us different (in part) from the rest of the animal kingdom… humans know
we are all going to die someday, monkeys don’t. Given this simple advantage, we
have the opportunity to plan for the future.
Most people don’t know how they
are going to die. Yet we do have the choice of how we are going to live. Good
advice might be to live life every day and keep an eye out for the future… and
plan not only for your future, but also for the future of those you love. Insuring
your life style (and income) is how we protect what is important to you. I have
met only a few people in my 30+ year career that don’t care about how they plan
for the future. I’m happy to say that these cases are not the norm. Most people
who have a dollar to their name would like to make good use of that dollar.
This is likely why they have a dollar in the first place. If someone has a
decent quality of life, they almost always want to continue the same standard
for the family who will live after the breadwinner is gone. Making another
person rich has never been the objective in people’s heart of planning. Not
making them suffer is most often the objective.
So how do you achieve this? In
life we know that we need to save. Save the extra money for tomorrow, or in the
case of premature death, spend a little on insurance which will in turn create
the lump sum that you would have saved, if only you had enough time. So, let’s
look at the very basics of life insurance. You expect to work until a specific
age. How many years are you from that age? Say you are 35 now, and you expected
to work until you are age 65. That is 30 years in the difference. To keep it
simple (and not to include tax and inflation), let’s say you earn $40,000 per
year. You expect then to earn $1,200,000 over those 30 years. This is the
income method to determine your human capital value. You are in fact a machine
which is expected to earn $1,200,000 for your family. If you die, your family
will not receive this money.
So here is the question, how much of that potential income
would you like your family to receive if you died tonight? Add up all your
insurance and savings and see how much they would receive. What is the
shortfall? Another way to look at things is a combination of debt and income.
Let’s say that you own a home and you have a mortgage of $200,000 on that home.
Would you want to pay this mortgage off in the event you die? Would you like to
leave a lump sum for education of your children? Is charity important to you?
Maybe the answer is a combination of several calculations. Say you wanted to replace
your income for 10 years and also pay the mortgage in full. This case would
suggest you might want $600,000 in life insurance. This would pay off the
mortgage and your spouse would be given $400,000 to provide 10 years of income.
There are so many solutions in terms of selecting the right amount of life
coverage. Some are simple and some are complicated; yet the questions must be
asked. Inflation should be considered, we might anticipate that your income
will increase due to promotions and experience. You should assume your life
style expands with age and disposable income, and tax strategies might also be
considered. Getting some advice along the way is always a good measure.
Speaking
to a professional planner can help you answer some tough questions about your
own requirements. The questions are not hard. They are just hard to ask
yourself.
If you are in Nova Scotia and would like some insurance
advice, please contact Corry Collins:
902-444-7000
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