Is term life insurance right for you? It’s time to find out.
Key takeaways
Term life insurance is an affordable way to replace your income so your loved ones don’t have to cash in savings, move, or liquidate assets quickly.
The tax-free benefit from a term life insurance policy lets your family stick to your intergenerational wealth strategy because they don’t have to sell assets to survive.
Calculating how much term life insurance you need isn't straightforward, so you should seek advice from an objective advisor.
Over the past three decades, I’ve met with hundreds of individuals, parents, and grandparents who want term life insurance as a financial backstop. The situations are always nuanced, but what attracts people to this kind of life insurance policy is consistent.
Here are the common reasons why our clients buy a term life insurance policy. If you agree with most of the statements below, we should chat about how to create some low-cost, stress-free financial resilience.
1. My salary is essential to other people
Most people who buy term life insurance do it for the simple reason that their income is essential to others. Without the money you earn at your job, or by owning a business, everyone who depends on you is left scrambling for a solution. And it may not happen quickly.
How much term life insurance do you need?
There are two common formulas for calculating the amount of life insurance you need. They are both good starting points but no substitute for a more detailed needs analysis. That’s something you should do with an experienced insurance planner.
Method #1. Economic or human life valuation
Economic life value factors include age, income, the number of years of income earning, and the likelihood of obtaining raises and promotions. If you are 40, then you may be insured for as much as 25 times your income plus the value of any debts. This is your ‘present value' financially.
Method#2. Capital needs analysis (CNA)
CNA factors age, income, debt, final expenses, and your assumptions about how much income you wish to see replaced. This calculation provides a baseline of suitable insurance coverage for a family.
Simple math $1,000,000 of insurance coverage replaces about $60,000 of income for 20 years. |
These methods are simplified. When we meet with clients to discuss their needs, our analysis goes much deeper. We explore all the ways a tax-free life insurance benefit can help your family. We’ll think about expenses like:
The cost of education.
Outstanding debt.
Philanthropic wishes.
The need to top up retirement savings.
Home maintenance.
Wealth erosion factors like inflation and taxes.
2. I want an affordable solution
Term life insurance is relatively inexpensive because it locks in coverage for a set term, then renews at a higher premium until it expires; usually well before you do. You could end up paying the premiums for 20 years and never receive the death benefit when the policy runs out. That’s what the insurance company is hoping for. That’s the risk they take, and it’s the reason you can own it for so little.
But that’s great news. If you outlive a term life insurance policy, it means you no longer need to replace income, and you’re still alive. It’s a strong indicator that you’ve done well for yourself and no longer need it.
Here’s some perspective: Everyone buys fire insurance for their home. No one ever feels ripped off because it didn’t burn down. Outliving your life insurance policy is a good thing. |
3. I want to keep my options open
Once you get approved for life insurance, you have options down the road. You can increase coverage, add riders, extend the term of your coverage, and maybe even convert to a permanent life insurance policy when your income goes up.
If you never get approved for life insurance coverage, it could become unaffordable or even unavailable later in life if:
Your health status changes.
You get diagnosed with a critical illness.
You take on a high-risk occupation.
Once you have coverage, it’s locked in, and these common events are no longer a concern.
4. I know that coverage at work is not guaranteed
Group plans are great, and we help companies build them all the time. They offer affordable life insurance coverage, and the employer usually picks up all or some of the bill. It’s a good deal until you lose your job or choose to leave the plan. When that happens, you will be applying for life insurance coverage on your own, when you are older, and perhaps you’ve had a diagnosis that will make insurance more expensive.
Food for thought: You wouldn’t drive a Ferrari off the lot without insuring it. Your lifetime salary is worth more than a sports car, so protect it the same way. |
When you maintain coverage, at an affordable level, in your own name, it can complement what your employer provides and give you access to guaranteed coverage in the future.
These are the kinds of things we explore in the insurance planning process because we don’t expect everyone to know all the facts about life insurance coverage and what’s at stake.
5. I know what’s at stake
If you die with no plan to replace your income, your family may be forced to make short-term sacrifices that will have lifelong consequences. The loss of your income could force them to:
Sell the family home.
Withdraw money from registered savings plans.
Take on long-term debt.
All of these outcomes are preventable when you have an insurance plan that you can afford, and you keep all of your options open.
Is term life insurance right for you?
If others depend on your income and you don’t have a plan to replace it, term life insurance is something to consider sooner rather than later.
You may be very happy to learn that most of our clients have found it easy to pay for life insurance coverage by making no-cost adjustments to their current financial plan. Our process identifies ways to save money and redirect it toward the most important goals. Let us show you how it works. Call 905-361-2026 to book an appointment or email david@dcwealth.ca.
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