8/21/2014

Life Insurance

There are a lot...a tonne of resources online around Life Insurance.  Calculators for how much you should have, blogs on what kind you should buy (whole, term, term to 100, universal), and debates around insurance as an investment vehicle...not to mention the plethora of do's and don'ts articles out there.

So..I'm not going to recycle all of that and write something of my own, but entirely unoriginal, but I will share with you a couple of my favorite blog posts as well as what I think Jordan and I should do.  I would also really appreciate your thoughts, and opinions of our plan.

Assumptions
  • We will not use life insurance as a way to invest
  • We will use life insurance to hedge our bets on the timing of our eventual deaths
  • We will, sometime in the next few years have children.  Maybe one, hopefully three, probably two.
  • While our mortgage and other debts will decrease over time, and assets will increase over time - other financial needs (for eventual kids) will go up.
  • That while we both of life insurance through our employers, we may not forever and so this won't be counted on (mine is 3x salary, Jordan's is 1.5x salary).
Our intention with regards to life insurance is to leave one another with enough money so they have choices. The choice to move, or to stay. The choice to take as much time that is needed away from work to grieve. Our intention is not for either of us to have more money than they need - our deaths will not be a lottery.

Assets & Income
  • Current debts including mortgage, both vehicles, and the LOC is about $375K.
  • Removing our home and vehicles from the equation (because we want choices), our current assets are about $72K.  This leaves a gap of about $300,000.
Okay...what else, well, we need to sort out other than the debts - what the loss of each other's income would do to our lifestyle.

Monthly Budget Needs

We both earn respectable salaries - and either of us could run the household bills without the others salary without the mortgage/car payments needing to be serviced. I have only to look at my stay at home mom/dad budgets to get an idea about income replacement needs.  The fixed bills would be fine, but when I add in a childcare assumption as well as continued savings for emergencies/vehicles ect - things get a bit tight...and by tight I mean un-affordable.  Have a look:

I would need about another $400/month, and Jordan would need about another $900/month.

Looking to Life Insurance Canada's website, endorsed by my favourite money author Gail Vaz Oxlade, I used the income replacement calculator to sort out how these monthly costs translate into insurance needs.  To replace the $400/month for 20 years, Jordan's policy would need to be for an additional $87K.  To replace the $900/month Jordan would need for 20 years, my policy would need to be for an additional $197K.

Something we'll have to ask an insurance broker is should we buy insurance assuming children - or wait until we have them and then adjust the policy, or buy another policy.

The Cost of Death

Okay...this one is sort of uck to talk about, but it's important too.  For my dad for example, who passed just two and half years ago, we had a very modest reception in a community hall.  The fees for the funeral parlor were just under $6,000 which included the rent of the hall and the incidentals associated with that.  His headstone was around $3,000, and the cost of the plot in my home town was around $500.  So $10,000 is not an unreasonable estimation.

Summary

Okay...so when we have kids I'll need a policy of around $500K and Jordan will need $400k - before kids I need a policy of around $310K.


What do you think?  Are we ready to go to a broker, are there things we're not thinking about?

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2 comments:

  1. When you go to see a broker, I think they'll be very impressed as you've already done most of the work for them! They will always try and sell you on more than you need so the fact that you're already aware of what you really need, it is a great advantage. T and I are doing declining term insurance. Since, like you guys, the mortgage is the largest factor in how much we need. However, in time as we pay off the mortgage, the amount of the life insurance required should go down. That's the hope anways :) Something to consider.

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    Replies
    1. Thanks Morgaine!! I was trying to get everything written down and organised.

      I was thinking about declining term - but then as the mortgage gets paid down; wouldn't we need more $$ in the event of having kids?

      OR! Would it be better to do declining life for debts; and then a new term for when we have kids?

      Thanks for commenting!

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