Determining our Life Insurance Needs I – Criteria

People generally don’t like talking about death, especially planning for it.  I’m no exception, but with the new home and child coming, I’m looking into insurance more seriously.  Before, with both of us working and make comparable income, life insurance wasn’t really a consideration because there weren’t any financial dependents in the picture.  The only thing we had covered was the mortgage via mortgage life insurance.

With the new home, we’re going with term life insurance instead of typical mortgage life insurance.  Why? The reason being is that mortgage life premiums stay the same with a decreasing benefit.  Term life benefits, however, do not change over the term.

Why not go with whole life or universal life?  To me, those products provide sub par investment return for the extra premium charged.  I’m planning on buying term life and investing the rest myself.

Hopefully, by the time that the term insurance expires (20 years), we’ll have a large enough portfolio to be self insured.  If not, we’ll continue to buy just enough term insurance to cover our needs.

If you want to read another opinion on term or permanent insurance, you can read Ed Rempel’s article with this thoughts on universal life insurance.

So looking at the worst case scenarios, how much life insurance do we need?  Here are some of the factors to consider:

Assets

  • Existing life insurance
  • Household after tax income if one spouse were to pass
  • Portfolio value (rrsp, non-reg, cash)

Liabilities

  • Debt load if one spouse were to pass
  • Household/Childcare expenses if one spouse were to pass
  • Child’s education fund
  • Child requirements if both parents pass
  • Funeral expenses

Tomorrow, I’ll get into the actual numbers of our insurance requirements.  What factors do you consider for the amount of life insurance that you need?

Photo credit: eh3k

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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JR
13 years ago

LIFE INSURANCE NEEDS CHANGE WITH TIME.

Use them for two reasons only, that is if you care about the ones you leave behind.

1 & 2:

1) Tax and estate planning

2) Early death, leaving enough for the family to sustain for at least 10-years

But as part of your overal life plan, watch the cost of doing this.

I know folks that have purchased huge sums, both term and universal life, joint, first to die last to die, term 100 etc.

I have universal & term

Inside the universal I have investments tax free

Life insurance Canada
13 years ago

I agree with you that people don’t like planning for what happens after their death, but even though it’s not pleasant subject, they should think about it. Another problem is that even when they are conscious about the subject, it’s hard to find the right insurance and the right company. I found some useful Life insurance tips for people who cannot decide which company is best for them and which kind of Life insurance they should choose.

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[…] Get Life Insurance.  With my first house, I simply signed on with the mortgage life insurance because it was cheap and required no qualification.  However, if I did more research, I should have realized that the benefits decrease while the premiums/payments remain the same.  Do yourself a favour and get term life insurance instead. […]

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[…] though she has no income, Show Nana the Money!. I liked Million Dollar Journey’s post about determining his life insurance needs. He’s right about Mortgage Life Insurance not being a good product or a good buy. I also […]

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13 years ago

[…] amAdd comment Permalink Yesterday, I wrote about the criteria that needs to be considered when calculating life insurance needs.  Today, I'm going to calculate our personal requirement for life insurance in case the […]

Ramis
13 years ago

yes some insurance companies do still have that option on. Also if someone dies as a result of an accident the payout is doubled, this options comes build in some policies and as a rider on other policies.

Bryce
13 years ago

Here is an AIG policy (I don’t work for them it was just one I looked at before)
http://www.aiglife.ca/wave/english/Product%20Information/Term%20Life/Term%20Insurance%20Product%20Overview%20-%20215E.pdf
Apparently it pays double if both die within 60 days of each other.

Bryce
13 years ago

I could be wrong but I believe it’s pretty common for first to die policies to pay out double in the case that both people on the policy die at the same time.

DJ
13 years ago

I think bare minimum, one should have enough to cover funeral expenses and all debts. I still think it’s important to have enough coverage to have some money for spouse and children but everybody has their own values, I suppose.

That’s a real good point about the car accident scenario. If both spouses die in a car accident, what then would happen to their minor children if there was no insurance?

Good call FT on the family plan insurance. That way you’re both protected as well as your estate and any children/dependants in the unfortunate event of the death of both you and your spouse.