Insurance Broker Canada | A Life Insurance Needs Analysis Is Accomplished In 3 Steps
If you're thinking of buying insurance you should find out how much to buy
, and thats where a life insurance needs analysis is useful. A qualified broker will be able to walk you through a complete life insurance needs anaylsis with specialized calculators, but this article will show to you how this type of analysis is done. There are 3 steps or parts to a life insurance needs analysis:What immediate cash needs you have (mortgage, loans, final expenses)
How much would you need for long term income replacement
What do you have in existing life insurance and disposable assets to manage this
The cost of life insurance is impacted by a few important factors
Age and gender
Smoking and other risky lifestyle habits
Your overall health (good health can get discounts while poor health will be charged more for life insurance)
How much life insurance you need
One of the principal factors, above, is the amount of life insurance you need when calculating the cost of your life insurance. So, lets look at how to figure out the life insurance need.
Immediate Cash Needs
You immediate cash needs comprise of liquid cash requirements that you would need in the next 6 12 months if someone passed away. Here is a brief list of things you might need money for if a parent passed away:
Funeral and final expenses
Paying off your mortgage and other loans
Setting aside money for childrens education funding
Producing or building an emergency fund
Building a childcare fund if a stay home parent/caregiver passed away
These can be very vital expenses. For instance paying for 10 years of childcare in Canada can range from $150,000 to $250,000 depending on where you live and the level of care you wish to pay for (a day home would be less money than a live in nanny). Youre mortgage would also be a large portion of the life insurance needs if you have taken out a big loan from the bank.
Long Term Income Replacement
Even though you might think your mortgage is your largest asset, it is nothing compared to replacing your many years of future earning potential. You family is dependant of the income you bring in, relying on that income to pay the bills and put food on the table. If that income stops, life as you know it stops.
Life insurance will provide a large pool of capital wealth that your survivors can draw on over the years to substitute your lost income. For instance, in order to generate $60,000 per year in after tax income for 20, you would need capital in the amount of $785,000 in the bank today (based on a 5% after tax growth rate).
As you can see, your long term potential income is worth a lot more to your family than a house, maybe worth $300,000 or $400,000. You have to be sure to protect your families lifestyle by insuring your income will be replaced.
The life insurance needs analysis will indicate the present value of capital required to generate the income you need in case anything happen to you. Based on an assumed growth rate an inflation rate assumptions, you can calculate the capital required to replace lost income for any period of time. A good rule of thumb is to replce your income until your youngest child is financially independent (around age 21).
Existing Assets You Might Have
Now you have to consider the current assets you would have to provide funds for all these needs. Be sure to only incorporate liquid assets that you plan to use in case of tragedy. For example, liquidating your RRSP is a very BAD idea since there is immediate taxation on the money and the surviving spouse loses his/her opportunity to use the tax exempt spousal roll-over rules from CRA. Here are some typical sources of funding for your survivors financial needs:
Existing life insurance or group life insurance at work
Non-registered investments that are not part of your retirement plan
The sale of a business, investment property, or excess assets, like the sports car that only gets driven in the summer
Cash Emergency Fund
If you do plan to sell property, business assets or other investments be certain to plan very cautiously. You need to discount the present value of those assets in case the market makes it hard to sell them and it can take a long time to find a buyer.
Calculate Your Total Needs
When you know how much you need for immediate cash, long term income replacement and the available funds you have in existing assets, you can use this simple formula to discover your total life insurance needs:
Immediate Cash Needs + Long Term Income Replacement Existing Assets = Life Insurance Needs
Remember to check out our online Life Insurance Needs Analysis calculator to study your total life insurance needs toady.
A Life Guard Insurance Broker can calculate your familys life insurance needs
If you would like assistance from one of our qualified life insurance brokers across Canada, please contact us today. We can find you a professional local life insurance broker in your area that can analyze your life insurance needs and advise the best life insurance solution for you.
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