- Each person's situation and ambitions are different and unique. There is no one size fits all in terms of coverage. Consider your budget, financial obligations, funeral expenses and personal goals when selecting coverage.
- Methods you can use to estimate coverage before talking to a certified expert are to multiply your annual income by 10 or to add up the totals with the D.I.M.E rule (Debt, Income, Mortage, Education).
How Much Life Insurance Do I Need?
People tend to make erroneous conclusions regarding how much insurance they need. That's why you should consult an expert to determine the amount of coverage you need.
Most people understand the need to own at least a certain amount of life insurance. In Canada, more than half of the population owns some type of life insurance. However, the data also shows that many people are underinsured.
Most people tend to make erroneous conclusions regarding how much insurance they need. It is a widely accepted practice that before you purchase any form of life insurance, you should consult an expert to determine the amount of coverage you need. However, it is also a well-known fact that one of the reasons the majority of people have less coverage than they need is the failure to review their policy regularly. A once in a lifetime visit is therefore far from ideal. As a result, people end up paying for an inadequate amount of insurance that does not adequately protect their loved ones nor cover all their financial obligations in case of their death.
What's more, many people hold the notion that life insurance is far too expensive, and this makes them put off purchasing an essential element in any financial plan. Prices can vary enormously product to product, and we strongly recommend that you get a quote. It's cheaper than you think!
There is no universal answer to the question "how much life insurance do I need?". Everyone is unique and everyone's needs are different. It's therefore easy to see why coverage and rates vary from person to person.
Here at emma.ca, we love to see people making responsible choices and protecting their families. That is why we wrote this piece. With the hope that it may help someone on the road to making a great choice in figuring out how much life insurance they may need. To get you started on your journey, let's take a look at the factors that help determine how much insurance you need and how much your premiums will cost.
Factors That Influence My Life Insurance Quote
Your quote will be determined by several factors, some of which you have control over and some of which you don't, and this involves both personal and market factors. Despite the many things that come into play, there is a few rules of thumbs you can use to estimate how much coverage you might need before getting an expert opinion.
The easiest way to estimate your coverage is to multiply your annual income by 10 or 20. Generally, it's a safe figure to go with because the death benefit it generates can usually support your dependents for a reasonable amount of time in case you pass away. However, it is not very accurate because it does not consider the time value of money, nor does it account for people's different needs and aspirations.
What Type of Life Policy Are You Buying?
The price you pay is, without a doubt, influenced by the type of insurance you buy. There are two broad groups of life insurance, namely term life and permanent life. Term life insurance means you are covered for a specific amount of time (generally between 10 to 30 years). Many people opt for term life at the beginning of their active lives when debts are high (think mortgages), children are young, and annual income is low. With term life policy, your beneficiaries only receive the death benefit if you die when the term is in force.
Permanent insurance, on the other hand, covers the insured for their entire lifetime. The death benefit is guaranteed to the beneficiaries regardless of the time the insured person dies.
Before choosing which product you wish to buy consider the following:
To what resources do you have access?
The resources you have are a determinant of how much you can afford to pay for an insurance policy. Remember that you will be paying monthly (or annual) premiums once you sign the contract with the insurance company. To get the most of your life coverage, you need to abide by the initial agreement and make timely payments regularly. Assessing your resources and assets will allow you to picture the feasibility of buying and maintaining a particular type of policy. It is imperative not to overestimate your budget when choosing the right product. Don't forget, insurance is but one part of a larger picture.
What are your Financial Obligations?
Understanding your financial obligations is crucial in determining how much coverage you need. From a financial perspective, your obligations outline the role you play in your dependents’ life. Think about the education fees you are paying for your kids' schooling, the water and electricity bills, the rent or mortgage payments, etc. All the expenses you take care of every month that will remain even if you are no longer there. Their yearly total will help you determine how much insurance you need. Also, consider any outstanding debts or liabilities you have because they do not necessarily disappear when you die. If your house has a mortgage on it, then your family could be evicted if they fail to pay the outstanding amount, or they may be forced to sell. You, therefore, need sufficient coverage to pay off any debts you leave behind or at least have substantial savings put aside.
The number of dependents you have is another factor that you should consider. The more people you have depending on you, the more you will need to have in terms of the policy amount. Simply put, the more mouths there are to feed, the more coverage is needed. As family size increases', so should your coverage, thus the importance of reviewing your insurance regularly. Before settling on an amount, keep in mind the time value of money. As the saying goes: "a dollar today is worth more than a dollar tomorrow". This is due to inflation and its impacts on the rising cost of living. The coverage you choose today might not be enough to sustain your beneficiaries 10 or 20 years from now.
You can estimate the amount your family will need if you calculate how much you pay for recurrent bills and any other monthly expenses. The total can give you a rough idea of the costs that will remain if you die.
The Final Expenses
Funerals aren't cheap by any means. According to Inmemory, the cost of a funeral in Canada is between $5,000 to $10,000. You should factor these costs in when estimating your life insurance coverage.
Personal Factors Affecting Your Quote
Your insurer will help you calculate the amount of insurance you need, but the final decision always lies with you. The insurance company will then quote the amount you need to pay for premiums so that your beneficiaries can claim a payout if you pass away. The amount you pay is determined by
Your age is one of the most significant determinants of how much life coverage you need, and it also dictates how much you will pay in terms of premiums. As you get older, you might not need as much coverage as would be the case if you were younger due to accumulating wealth and retirement savings. People of advanced age are generally viewed as high risk by the insurer, and they, therefore, need to pay more in terms of premiums. However, being old doesn’t mean that you should not buy a life insurance policy. At Emma, you can get affordable life insurance policies even if you have more wrinkles than before 😉.
Your health status also determines how much you need for insurance. If you have a health condition, such as a chronic disease, you might be classified as a high-risk client by your insurer. You are therefore required to pay more for your life insurance, and when settling for a policy amount, you should keep this in mind (i.e. respecting your budget).
The health of your dependents should also be considered. The cost of taking care of a sick child, a sick spouse or a sick parent can quickly become overwhelming for the surviving members of the family if you happen to pass away. To be on the safe side, consider the health of your dependents and factor it in your policy amount.
Smoking is associated with poor health. Scientific studies have established relationships between smoking and some health conditions such as lung and colon cancer. Many insurers charge higher premium rates for smokers because they are considered of higher risk. However, the smoking fee may vary from one insurer to another.
Your quote for premiums is likely to be higher if you are a man. Insurance companies classify men to be higher risk compared to women. This is generally due to lower life expectancy for men in most countries (Canada included) as well as a tendency to engage in dangerous activities or occupations.
The DIME Rule
The DIME rule is a popular rule of thumb to estimate how much life insurance coverage is needed. DIME is an acronym that stands for debt, income, mortgage, and education. These are the four major considerations when choosing the amount you want to insure.
Firstly, add together each of your debts (final expenses can be included) to determine the liabilities you leave behind. Secondly, multiply your income by the number of years that your dependents would depend on you if you did not pass away. (Ex: when children leave the house to start their careers). Thirdly, add the outstanding amount of your mortgage. Finally, get an estimate of how much is required to fund your children's post-secondary education and add it to your total. With the DIME rule, you may be overshoot or undervalue the coverage you need, but it is a good place to start when discussing the topic with your insurance adviser.
As you may have noticed, calculating how much insurance you need requires taking into account many factors. That why we developed an algorithm to do it for us! Click here to access our free calculator and connect with one of our expert advisers, because owning a life insurance policy is one thing, but having the right amount of coverage is another.