A financial advisor will recommend every person accumulate financial resources of at least seven to ten times their annual income. The life insurance options and benefits you choose will have an impact on the exact death benefit your loved ones will receive at the time of your demise.
Different factors like any debts, loans, mortgages, the number of young dependents, and any taxes incurred on the various properties you own will affect the exact life insurance coverage you need. You also need to make sure that you leave your loved ones with enough financial resources to cover your funeral costs.
How Much Life Insurance Do I Need?
How much life insurance do I need? This is a question that has no right or wrong answer. A younger individual, with a wife and kids, in the middle of their career, will have different expectations for the life insurance benefits from their life insurance plan in comparison to a retired individual. The accepted guideline is that you have enough life insurance benefits to cover your debts, income, mortgage, and children’s education. It is sometimes also referred to as the DIME formula for life insurance. Let’s have a closer look.
- Debts: How much total debt is in your name?
- Income: What is current monthly income? It needs to be replaced by the life insurance benefits for your dependents and survivors to have a successful future.
- Mortgage: What is the total amount remaining on your mortgage?
- Education: How many children do you have? What are the educational expenses your dependents will need to pay in case of your demise?
Let’s get into the details now that you have a rough idea of how much life insurance coverage or the amount of life insurance benefits you need to leave your loved ones.
Detailed Analysis Of The Exact Amount Of Life Insurance You Need In Canada
As we have described earlier, the exact amount of life insurance you need can be calculated by the DIME formula. Let’s look at each one of these factors in detail.
You need to calculate the total amount of debt you owe to get a good understanding of the requirements for the total life insurance benefits of your life insurance plan. Calculate the total credit card debt you owe taking into consideration the many different lines of credit you have. Take into consideration whether or not you will make major credit purchases in the near future that might have an impact on your total debt. Also, assess the total amount of remaining installment payments you need to make on big-ticket items you have already purchased.
A practical suggestion to make life easier for your loved ones is to add your funeral costs to your total debt. This way your loved ones will not need to turn to anyone else for your funeral expenses. For example, you have a total debt of $40,000 and funeral costs are $12,000 in your area. Your total debt would look something like this:
Total Debt: $40,000 + $12,000 = $52,000
Now we need to assess how long your family will need your financial support based on your current spending patterns. This should also take into consideration the age of any children that will require financial resources to spend on their education. Think of how long it will take all of your children to achieve their final educational qualification. For example, you have an annual salary of $60,000 and you want to financially support your family for the next seven years because this is the time it will take all of them to graduate and become fully independent.
Total Income: $60,000 X 7 years = $420,000
This means that your life insurance policy benefits need to deliver a total amount of at least $472,000 to be able to pay off debts and manage an income for your family after your death.
What is the remaining amount on your mortgage? You must have life insurance coverage for the total amount remaining on your mortgage. You can even consider adding extra costs for any renovations that might be required which are completely based on your discretion. For example, you have $200,000 remaining on your mortgage and you plan to make renovations worth $15,000 in the near future.
Total Mortgage: $200,000 + $15,000 = $215,000
This means that the total life insurance benefits payout of your life insurance policy needs to be at least a total worth of $472,000 + $215,000 which is equal to $687,000 in total.
According to the Government of Canada, the yearly and lifetime contribution limits for the Registered Education Savings Plan (RESP) for Canadians is currently $50,000. To receive the maximum payout on an RESP for a single child, you need to make a total contribution of $50,000.
According to the DIME formula, this individual will need total life insurance coverage for an amount of $52,000 + $420,000 + $215,000 + $50,000 = $737,000. This amount will cover the individual’s family expenses for a period of seven years after the individual’s death.
How Much Life Insurance Do You Really Need In Canada?
The traditional method of calculating how much life insurance you need in Canada was to find out the figure that is 10 times your current annual salary. But this has proven to be a completely arbitrary method of calculating the life insurance benefits for an individual.
Every person has unique possessions, property, and business organizations that can be practically profitable for the people they leave behind. Some of these possessions will automatically increase in value as time progresses. If you are looking for personalized advice and some of the best insurance policies in Halifax, Nova Scotia you can trust McIver Insurance for dependable customized life insurance products. Their professional life insurance underwriters can design a life insurance plan according to your custom requirements based on your exact preferences.
Another way to conveniently calculate the total amount of life insurance coverage you need is to calculate the amount of money you will make by the time you retire. Make your starting point from the current day and your rate of earnings equal to your current salary. Then make the necessary calculations to calculate the total amount you will earn by the time you retire. This is the total amount of life insurance coverage you need to safeguard your family’s future.