How Much Term Life Insurance Cover Do I Need?
The most significant question on the minds of many when it comes to Term Life Insurance in Canada is: How much Term Life Insurance do I need to get? Determining how much coverage you will need can be essential in ensuring your loved ones have sufficient financial coverage in case you die. However, with everything that needs to be taken into consideration, your current income and debts to the future expenses you may incur in the course of time becomes quite complicated.
In this detailed blog post, we will discuss the important considerations to determine how much Term Life Insurance you may need and answer typical questions that consumers have related to what the ‘best’ Term Life Insurance Policy is. First, we will also delve into the best ways to get Term Life Insurance Quotes Online and how Term Life Insurance Brokers may help you throughout the entire process.
Understanding Term Life Insurance Coverage
Term Life Insurance pays the person for a particular period or “term”—typically 10, 20, or 30 years. In the event that the policyholder dies during that time, a death benefit payout is awarded, which is a lump sum of money paid out by the insurance company. That money can go toward anything: paying off debts and living expenses, saving for education, or even helping to replace lost income.
Unlike permanent life insurance, which covers you for your lifetime, Term Life Insurance is specifically designed to meet specified financial needs for a certain period of time, thus making it affordable and flexible for many.
However, the most arduous decision in the Term Life Insurance buying process is determining how much coverage you actually need. Let’s break it down to what we assume are the main factors which must guide your decision.
Key Factors to Consider When Deciding Your Term Life Insurance Coverage
Income Replacement
One of the primary reasons for purchasing life insurance is to replace an individual’s income in the event of an untimely death. If you are a family breadwinner, there are very likely expenses your family will need to commit to when you pass away to continue meeting the same standard of living, paying bills, and assuming other financial obligations.
A thumb rule is to obtain coverage amounting to 10 to 12 times your annual income. This will provide your family with sufficient funds to sustain themselves for a decade or even a generation after you are gone, thus allowing them ample time to get used to their new financial reality.
For example, if you make $80,000 a year, then you would look for a term of insurance that pays a minimum of $800,000 to $960,000 in coverage. Once you have the above amount of coverage, your family will be able to pay for their living basics, such as housing, utilities, and groceries, without anxiety or financial strain.
Debt and Liabilities
Your debts are another critical factor to consider when calculating your Term Life Insurance Coverage. These might include:
- Mortgage balance
- Car loans
- Credit card debt
- Student loans
- Personal loans
If you die unexpectedly, your family may be burdened with these debts. A Term Life Insurance Policy should pay off any outstanding debts that might come its way, and therefore, your family members are not burdened with these responsibilities.
For example, if you have a mortgage of $ 400,000, an auto loan of $30,000 and a credit card debt of $15,000, you will add these to your total need for coverage. Therefore, in such cases, you would require a minimum of $445,000 in extra coverage above and beyond what you would need for income replacement.
Future Expenses
In addition to your current expenses, it’s important to plan for future costs. These might include:
- Children’s education
- College or university tuition
- Wedding expenses
- Retirement savings for your spouse
The cost of raising children will always be a high investment, and the extra cost incurred in higher education may be substantial. With all the future expenses taken care of in your Term Life Insurance Coverage, you can provide assurance that all your children’s needs, in terms of funds, will be covered in case you are not around.
For instance, if you have two children and expect that after post-secondary education, you would require $50,000 for each, then this means $100,000 that you should plan for coverage. By planning for these future expenses, your family will be protected on the financial front, irrespective of any result.
Funeral and Final Expenses
The cost of a funeral can differ from province to province, and in Canada, it generally runs between $5,000 to $15,000, depending on the service and burial you opt for. Many families are not ready for this kind of expense, making it very smart to add funeral costs in Term Life Insurance Coverage. This prevents your family from having to worry about these expenses after losing you; it would be your last gift to them.
Inflation and Cost of Living Adjustments
When determining how much Term Life Insurance Coverage you need, it’s important to factor in inflation and the rising cost of living. The value of money today may not be the same in 10 or 20 years, so consider increasing your coverage amount slightly to account for future inflation.
For example, suppose you estimate that your family will need $500,000 in coverage today. In that case, you might opt for a policy that offers $550,000 or $600,000 to ensure your family can maintain their standard of living, even as prices rise over time.
Duration of Coverage
The length of your life insurance term should also be within your financial needs. Most people tend to opt for a policy that will run until their financial liabilities are reduced or completely phased out. For example, you can opt for coverage until your children grow up, the mortgage has been settled, or you have enough savings to provide support for your family without requiring life insurance.
If you are replacing income while your children are still little, a 20-year term may suit you perfectly. If you have a longer mortgage repayment term or if you are planning to work for 30 years, a 30-year term could fit your needs as well.
How to Get Accurate Term Life Insurance Quotes Online
Now that you have calculated the level of coverage that is required, another step to getting Term Life Insurance Quotes Online is to seek them online. You will find numerous insurance companies across Canada that provide an online quote, where you can simply fill in your information, and an estimate will come out on how much the policy would cost.
To get better quotes, provide the following information:
- Your age
- Health status
- Term length (10, 20, or 30 years)
- Coverage amount (based on the factors we discussed above)
Of course, the final premium will depend on factors like overall health status, smoking, and other personal habits, but the comparison of terms online is a wonderful way to compare multiple policies and see what fits your budget.
The Role of Term Life Insurance Brokers
While the online tools are a great starting point, working with Term Life Insurance Brokers comes with its benefits. A broker acts as a middleman between you and the insurance companies. He’ll present you with the best possible protection at the most economical cost. A broker will be able to guide you through the process, give you answers to questions you may have, and also help you personalize a policy to meet your specific needs.
If you are offered policies from multiple providers, the broker can compare prices for you to save on your overall expenses. Also, he can guide you through the minute details of fine print so that you are not left surprised with unwanted coverages when you need them.
Now, many people experience saving time and effort by hiring a Term Life Insurance broker. They will not have to battle their way through the complexities of life insurance, as a professional can guide and assist them.
Balancing Coverage and Affordability
Now, to ensure that you are getting the right balance between adequate coverage and affordability, avoid covering everything; however, it is tempting to purchase the highest amount of coverage possible.
Consider how much you can realistically afford to pay in premiums each month. You’ll find that the Term Life Insurance plan is fairly affordable, permanent insurance being more expensive. Therefore, not incurring a strain on your finances is easier with Term Life Insurance.
If you are worried about affordability, a Term Life Insurance Broker can advise you on how to get your policy adjusted in such a way that you will be able to reduce your premiums. For instance, instead of a long-term, you may choose to have a short period or simply have the coverage amount slightly reduced for that period; alternatively, you could look for a level premium policy, which generally will keep the premiums constant over the term period.
Reviewing and Updating Your Coverage Over Time
Once you have a Term Life Insurance Policy, the next step would be a regular review. You see, what you needed five years ago may not be what you need today. Therefore, any change in marriage, children, new home purchases, or changes in income may compel a change in the coverage you require.
At Canadian LIC, we always encourage insurance clients to review their life insurance policies every few years to ascertain whether they are still appropriate for their financial situation. In case your needs change, you can alter your policy, purchase additional coverage, or change to a different type of policy entirely.
Final Thoughts
One such process to secure the financial future of your family would be determining how much Term Life Insurance you are going to need to buy in Canada. Taking all factors into consideration, including income replacement, debt repayment, future expenses, and inflation, you can determine the amount of coverage for a given situation.
Although term life quotes are available online, you could also seek the advice of Term Life Insurance Brokers, who can further assist you in picking out the best coverage in terms of what suits your needs best. What is great about term life, however, is that the benefits must be reasonably balanced between coverage and affordability such that you are secure about the future of you and your loved ones.
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