I have often wondered how many people really understand if they are over or under insured.
Remember that your most valuable asset is your ability to earn income, it would then make logical sense to insure this asset.
Determining the amount of life insurance one needs varies depending on who you talk to. I will give you a brief description of what I believe is one of the simplest ways to determine this.
It all boils down to two questions that would be asked of your spouse, and they would be:
• How much income would she require if she lost you today?
• How long would she need this income for?
Once these questions have been answered we now have a starting point.
What needs to be done next is to calculate the total insurance by adding all personal insurance to group benefits insurance provided by your employer.
The next step is to take this total, and using certain assumptions, build an income projection to determine if the total current insurance satisfies the needs of your spouse.
In other words, to use an example, let’s say your total current insurance amounted to $500,000 and your spouse required $3,500 per month for 20 years indexed at two per cent per year to take care of inflation. How long would the $500,000 last?
The numbers are punched in and we determine that the cash runs out after 14 years. So how does this equate to a shortfall of insurance?
We simply use a process of elimination by continually adding more insurance until the income lasts the full 20 years, so in this case there is an insurance shortfall of $150,000.
By calculating the numbers this way makes it very real and understandable for potential buyers of insurance that they are not over insuring.
I generally place life insurance under the category of “Lifestyle Protection” because that is ultimately what you are protecting.
Remember to always consult your advisor before taking any action.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd and an Investment Funds Advisor with Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd or Manulife Securities Investment Services Inc. For comments or questions Stuart can be reached at firstname.lastname@example.org or 250-954-0247. Website www.precisionwealth.ca