Typically, once you have decided to buy life insurance, the next question is how much life insurance do you need? Most Insurance Calculators on the market will ask your age, how many dependents you have, what are your lifestyle needs, how much debt you have, any education savings requirements for children, and any other lump sums you may want to provide for, like if you want to create a legacy for a charity. And out of that black box full of information it spits out a number. Do you trust it? You would have to know all the assumptions that have been made for you before you could. Things such as the inflation rate, investment return, when you plan on retiring, how much you plan to spend in retirement because in the absence of your income you’re no longer saving for that, inheritance, dependent elderly parents. The list is endless. The point being, it’s not only difficult to predict these things, it’s almost impossible.
You should never be put into a position of struggling to determine how much coverage you need. That’s why we take a much more practical approach to determining how much life insurance you need. For this purpose, we are trying to figure out how much TERM life insurance you need. Term insurance is meant to solve a need that doesn’t last forever. For the most part, it is meant to replace your income between now and retirement. And so all we have to do is figure out how much money you would need in a “bucket” today, to replace all of your future paycheques since it’s your income that pays for your lifestyle, your debt, and your retirement savings. This calculation is known as Net Present Value (NPV). Don’t be alarmed! We have made this process easy for you. If you want to know the Net Present Value of your future paycheques, click here.
When doing this calculation, remember that the death benefit for life insurance in Canada is tax free. And since you don’t get to spend or save the taxes that you pay on every paycheque, you only need to buy enough insurance to replace the after-tax portion of your income.
As mentioned early, replacing your income is the primary reason for term insurance for most people. But it’s not the only reason! Other reasons you may want to buy term life insurance are:
Once you figure out how much life insurance you need using our simple calculator, the next step is buying the right duration or term.
A brief history lesson will come in handy here. In the 90’s there were only two terms to choose from; 5 year term and 10 year term. The renewal premiums for these plans were very reasonable, so much so that you could renew a 5 year plan 3 to 4 times before you would even notice the increase in your bank account. The problem with that is that the insurance companies had a hard time figuring out when you might choose to cancel that plan, which made it difficult for them to predict their profitability. The industry solved this problem by taking a 5 year term plan, and make it last 10 years at the same premium, and 10 year term plans became the new 20 years term. What that means for you is that you get the same affordable term insurance plans of the 90’s that now last twice as long at the same low cost. The catch is that the renewal price on the new 10 and 20 year terms is very intentionally exorbitantly expensive. That’s because you are meant to cancel your term life insurance plan after the first term. The strong disincentive to pay the renewal premium price gives insurance companies certainty about when you are likely to cancel, which in turn allows them to more accurately predict profitability and keep the entry price to term life insurance extremely affordable at any age prior to 65.
