What Should Life Insurance Cover?

by Tax Guy - Burlington Accountant on June 16, 2009 Print This Post Print This Post

Life insurance is a tool that is used to help manage financial risk in the event of some uncontrollable event.

Two uncontrollable events that can impact us with our financial goals are death and disability which cause our ability to earn income to come to a complete stop!

Why Have Life Insurance?

When you die, your family will have an immediate need for cash to pay for your final bills. Insurance is a tool to create a pool of funds to be used when it is most needed.

Life insurance also helps replace the income stream that was lost when you passed away.

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What Expenses Is Life Insurance To Cover?

The types of expenses can be grouped into three categories: Final expenses, family care expenses, and survivor expenses.

Final Expenses

As mentioned above, final expenses create a pool of funds for your survivors. These expenses may include:

  • Funeral expenses,
  • Final medical bills,
  • Current family bills and household expenses,
  • Outstanding loans
  • Unpaid property taxes
  • Probate fees and legal costs, and
  • Final income taxes.

Family Care Expenses

The life insurance should provide for your family and their current and future needs. Life insurance should provide the following:

  • A permanent residence. The policy should cancel or significantly reduce the mortgage on the primary home.
  • Education – Your insurance should help prevent an education plan from falling off track.
  • Emergency Fund– Your life insurance should also provide an emergency fund that your family can draw on in case of illness, accidents, or emergencies.

Survivor Expenses

Finally, your insurance plan should provide income for your surviving dependents. This can include income until they are capable of caring for themselves or when they have finished university.

You may also need to provide income to your surviving spouse for a period of time or perhaps for life.

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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