Select Page

A commonly asked question regarding life insurance is “how much life insurance is enough?”

Simply put: the amount of coverage needed depends on the amount of debt and income loss the plan has to cover. This is determined by the total assets that can be allocated subtracted from the amount of debt/costs.

The following is an easy way to figure out the amount of coverage you need. Note that this method is an approximation. For greater accuracy please consider contacting Baker & Baker Benefits for a complimentary, no-obligation Life Insurance Needs Analysis.

### Simple Life Insurance Calculation

To calculate the amount of required coverage:

1. Figure out the sum total of all financial obligations (home mortgages, funeral costs, car loans, student debt, etc.). Note that the average cost of a funeral in Canada is around \$8,000 to \$10,000.

2. Decide how many years of income replacement you would like (commonly people want their life insurance plan to cover 3-5 years of lost income). Add this figure to the sum of your financial obligations (see above step). If you do not want to provide income replacement then skip this step.

3. Add together any savings and assets that can be put towards costs, and subtract it from your total calculated above. If you do not want savings/assets to be used for living expenses after you pass away then skip this step. (It is common for assets to be used as an inheritance to surviving children and/or spouse).

4. Round up the resulting amount to the next \$100,000.

Here is a sample calculation:

#### Step #1: Financial Obligations

Outstanding mortgage (\$155,000) + credit card debt (\$13,000) + student debt (\$20,000) + funeral costs (\$6,000) + car loan debt (\$5,000) = \$199,000

#### Step #2: Income Replacement

3 years salary (\$55,000 x5) = \$220,000

#### Step #3: Assets

Investments (\$25,000) + bank account savings (\$17,000) = \$42,000

#### Step 4: Round Up Required Coverage Amount

Financial obligations (\$199,000) + income replacement (\$220,000) – assets (\$42,000) = \$377,000, rounded up to the magic number of \$400,000.

### Extra Points to Consider

The following points are food for thought when it comes to protecting your loved ones financially:

Try to anticipate all the costs that you would like covered. If you don’t get enough now you may not be able to get more coverage later (and if you do qualify for additional coverage in the future it will cost you more money as you age.)