It all comes down to two easy questions.
Published January 2021
So, you’re thinking about getting life insurance – great choice! Life insurance can be an important part of your financial plan for your family. It can help protect the life you’ve worked hard to build for your family. If the unexpected were to happen and you were no longer there, it could prevent your loved ones from having to sell the family home, or depleting your surviving spouse’s retirement savings.
Term life insurance is a popular choice because of its affordability and flexibility. If you apply while you are younger and in good health, you’ll enjoy access to the best rates which stay the same over the length of your coverage, also called the term.1
The payout from the policy is flexible, and can be used by your beneficiaries any way they want: to cover bills and living expenses, help pay for a child’s education, make retirement more comfortable for your partner, you name it. It’s most often used to replace lost income and avoid a wholesale change of lifestyle following the death of the policyholder.
The two big questions: how long and how much?
Though choosing the right life insurance may seem daunting, don’t let it put you off. It all comes down to two simple questions. How long to buy it for, and how much to buy.
How long should you buy it for?
How long you purchase the coverage for is called a term. Many insurance companies offer terms of 5, 10 and 20 years, some even longer. Which term you choose should be based on the duration of the situation you want to cover. Here are some examples:
So now that you have an idea of how to choose the duration of term you purchase, let’s look at how much coverage you should buy.
How much should you buy?
There are a few different models to help you decide this. Each involves a very simple calculation.
- Income replacement. Many experts recommend that you buy 7 to 10 times your salary in life insurance to replace lost income in the event of your passing.2
- Years to retirement. With this method, you simply take your annual salary and multiply it by the number of years you and your partner have left until retirement. This can help your spouse avoid having to dip into your combined retirement savings to cover living expenses if you were no longer there.
- Current and future debts. In this case, you would add up your mortgage balance, any other debts you have such as lines of credit and student loans, plus the cost of your children’s future university education.
Once you determine the period of time you want to cover, it’s easy to roughly calculate how much coverage you should get. Term life insurance is really not complicated at all and can be a great financial tool to help protect your loved ones and the life you’ve built for them.
1 Forbes Advisor, Choose the Right Term Life Insurance, October 2020.
2 Investopedia, How Much Life Insurance Should You Carry?, October 2019.