How Much Life Insurance Do You Need?

by Tax Guy - Burlington Accountant on June 11, 2008 Print This Post Print This Post

Over the last few years my income has changed rather steadily and we’ve had another baby.  So it’s time to re-evaluate my life insurance coverage. 

I view insurance as protection to my family in case I should suddenly die.  I want to ensure that my wife and children are adequately taken care of and that they are not unnecessarily burdened as my income is a significant portion of our household income.  I do not view insurance as a windfall for my family, but simply a mechanism to replace certain obligations that I have and will cover through the years.

In looking at the major categories of expenses I will look at my family’s immediate needs, future income needs and account for existing resources available to cover these expenses.  The analysis also include existing resources available that can be used to offset my family’s need.

Life Insurance needs

Immediate Needs
Final Expenses (Funeral etc.)$10,000
Emergency Fund20,000
Pay Off Mortgage199,800
Other Debts10,000
Education Fund*64,100
Total Immediate Needs $303,900
Future Needs
Education Fund* $13,600
Income Replacement**423,000
Total Future Needs $436,600
TOTAL NEED $740,500
Available Assets
Investments $16,000
Retirement Assets 35,000
Other Personal Assets*** 20,000
 Total Available $71,000
LIFE INSURANCE NEED $669,500

Education Fund

I have three kids: Two teenagers and a two year old.  In today’s dollars I’m figuring that tuition will cost $8,750 per year or $35,000 for a full four year term.  The two older children are 1 and four years away from college and thus I am not willing to put their college funds at a significant risk.  Therefore I am assuming a return on investment of 5% and inflation of 3% for a real rate of return of 2%.

For the 17 year olds present value cost is $32,700 and the 14 year old’s projected present value is $31,400.  The baby has a longer time frame and I’m projecting an 8% return with 3% inflation.  The present value of her education fund is $13,600.

Income Replacement

If I were to pass away today my family would no longer be burdened with my living expenses.  I anticipate my wife could easily live off of 60% of my current after-tax income of $30,000.  She is 36 years old now and I would like to ensure she is taken care of until at least the baby is through college.  I expect she would need additional for at least 25 years.  Using the same assumptions as for the two-year-olds education fund, the present value of the income replacement is $423,000.

Other Personal Assets

These are personal items that could be sold if I were to die.  These include things like my car and some other personal valuable effects.

Conclusion

I currently hold a term life insurance policy of $600,000 and should look at increasing the coverage to $700,000 to cover the anticipated shortfall.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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