The Need for Life Insurance

It should come as no surprise when I say that life insurance is extremely important in any financial plan. There isn’t a set amount or kind of life insurance that every person should have. You are all unique and have different life insurance needs which should have different life insurance strategies to cover those needs.

In this blog entry, I’d like to address using life insurance to replace your income for your family. Not a lot of people like to think about this, but I think it’s an important question to ask yourself: “If I die tomorrow, what will happen to my family?” After you ask yourself that question, can you sleep easy knowing that your loved ones will be taken care of and that no one’s standard of living would decrease?

No doubt that there are many monthly and annual bills to pay, not to mention rent or mortgage payments, and retirement and education savings plans. If your family lost your income, would they be able to continue to pay these bills and continue their savings? Let’s look at an example of a young family with a mortgage and two kids. They are a two-income household.

John is 35 and works as a journeyman electrician. His wife Sandra, age 33, works as a bank teller. They’ve been blessed with two girls: Jackie, age 3, and Rachel, age 6. One night, over supper, John and Sandra were discussing their cash flow and were wondering what would happen to their family if either one of their incomes wasn’t coming in anymore. The only amount of insurance they have is basic group life insurance through work and the Canada Pension Plan Death Benefit. If either of them passed away, the other would receive $30,000. They said that they’d both continue working if something happened to the other.

Their income and expenses per month are as follows:

 

Monthly Income (after tax, CPP, EI, etc.)

John’s Income$4,000
Sandra’s Income$2,500
Total:$6,500

 

Monthly Expenses:

Mortgage$1,800
Property tax$300
Property Insurance$90
Utilities, Phone, and Internet$600
Day Care$800
Personal Short and Long Term Savings Plans$500
Clothing, other Personal Expenses$250
Groceries/Household Goods$550
Hobbies/Entertainment/Restaurants$300
Vehicle Gas/Plates/Maintenance$350
Total:$5,540

As you can see, if something happens to John, Sandra doesn’t have nearly enough money to sustain her and her kid’s standard of living.

The most glaring bill that pops out is the mortgage. The outstanding balance of the mortgage is $400,000. It is very wise to have life insurance in place to pay off that mortgage. After the mortgage is paid off and she is collecting CPP Survivor Benefits, her immediate cash shortfall (for a 2 year period while Jackie attends daycare) is still $940. Once Jackie is in school all day and daycare is no longer required her cash shortfall is $140.

However, if Sandra were to be the one who passed away, John would have enough income to maintain his family’s standard of living after the mortgage is paid off.

John and Sandra have begun to realize that they do need more life insurance. Currently, they only have enough for a funeral and maybe 6-8 months of income. After visiting with a licensed life insurance agent and giving the agent the above information, they’ve discovered that to maintain their standard of living if John passes away, they will require another $600,000 of life insurance on him. To maintain their standard of living if Sandra passes away, they will need another $400,000 of life insurance on her. This will give them enough cash flow needed to maintain either of their lifestyle’s for at least 20 years. (Assumptions: 4% rate of return, 2.5% inflation)

Their insurance agent has proposed a term 20 life insurance plan for $600,000 on John and $400,000 on Sandra. This would cost $65.52/month. The best part of it is, as they pay down their mortgage, their coverage won’t decline and they choose who the beneficiary of the money is – not the bank! I will discuss that in my next blog post.

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