# Do we need life insurance?



## Plugging Along (Jan 3, 2011)

I really hate buying life insurance, as I look at it as a 'lose - lose'. If I don't use it, I lose the fees, if I do use it I've lost my life, but I do understand the reason for it. 

What I'm trying to figure out is if I really need life insurance or not. If so, how much?

Some facts/stats:

We have two young children. 2 & 5
No debt (outside of mortgages)
Will be mortgage free on our PR this year
Have a small mortage on our recreation property 
Larger mortgage on rental property
Have RRSP
Have Non Registered amounts
Incomes are split pretty evenly between two of us. Spouse makes a little more. 
Spouse has $500K life
I have 2x my salary from work. Never sure how I will staty

Here's my thoughts:
Rentals pays for itself in any scenario
All scenarios, the children have gaurdianship, and the people we have selected all the means (financial) to take care of our children
If either one of us dies, the other salary can cover off the living expenses. We would probably sell the recreation property because it would not be as fun without the other person, and use that extra money for the education savings for our two kids. Without any mortgages, either of use could pay for the living expenses, but there would be less for savings and retirement, and any extras. 

If both of us die, everything is left to the kids in trust. Our current net worth, is enough to cover both of them and their educations. 


Have I not considered anythigng. Is it worth getting additional insurance?


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## atrp2biz (Sep 22, 2010)

I'm no expert, but to me, you don't need it.

But what about disability insurance? The cost of living without income would appear to be more of a hardship than simply dying.


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## OptsyEagle (Nov 29, 2009)

It's only one simple question. Will the surviving spouse suffer financial hardship if the other spouse dies. If the answer is yes, then you need life insurance, if it is no, you don't.

I still bet that it is yes. Term insurance is cheap and keep in mind, the dinner you ate last night isn't worth much to you anymore either. Insurance is a cost of living and here it is a cost of ensuring the ones you care about can continue to live.

That's about it. You decide. Good luck.


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## plen (Nov 18, 2010)

> as I look at it as a 'lose - lose'. If I don't use it, I lose the fees, if I do use it I've lost my life


Funny, I look at it as win-win. If I don't use it, I've not died early, if I do use it, my loved ones will be able to live easier


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## hystat (Jun 18, 2010)

Plugging Along said:


> We have two young children. 2 & 5......
> the people we have selected all the means (financial) to take care of our children


you need life insurance. 
Anyone inheriting your children should be awarded the means to support them in a manner you want them raised in. 
Doesn't matter if Donald Trump is the new guardian, the kids should come with their own care package in my opinion.


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## Four Pillars (Apr 5, 2009)

hystat said:


> you need life insurance.
> Anyone inheriting your children should be awarded the means to support them in a manner you want them raised in.
> Doesn't matter if Donald Trump is the new guardian, the kids should come with their own care package in my opinion.


In that case there will be a large estate which can be used to help raise the kids.


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## Dana (Nov 17, 2009)

I agree that you need to provide for you dependents in the event of your sudden departure. You cannot estimate the 'extra' costs that could be associated with your death. What if your spouse is unable to work? What if you children require a full-time caregiver? What if your spouse loses his/her job after you are gone? Too many what-ifs, that's why if you have dependents you need insurance - even if it just a term policy until the youngest turns 18. 

Just my opinion.


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## Plugging Along (Jan 3, 2011)

Dana said:


> I agree that you need to provide for you dependents in the event of your sudden departure. You cannot estimate the 'extra' costs that could be associated with your death. What if your spouse is unable to work? What if you children require a full-time caregiver? What if your spouse loses his/her job after you are gone? Too many what-ifs, that's why if you have dependents you need insurance - even if it just a term policy until the youngest turns 18.
> 
> Just my opinion.


The estate we would leave right now is more than enough to cover both of our childrens needs including education until they are out of University. This already factors in if the gaurdians would require a larger home or a nanny to help out. 

The only thing that might throw something for a loop is if my spouse was physically unable to work. If he was still able to work, then it would be financially tight, but not too bad. 

So then my question is how much insurance would we need. I have heard 20X your income, I think that is WAAAAAY too much to leave behind. 

So for everyone... how much would you leave to raise your two kids (if you had them)?


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## Four Pillars (Apr 5, 2009)

Plugging Along said:


> The estate we would leave right now is more than enough to cover both of our childrens needs including education until they are out of University. This already factors in if the gaurdians would require a larger home or a nanny to help out.
> 
> The only thing that might throw something for a loop is if my spouse was physically unable to work. If he was still able to work, then it would be financially tight, but not too bad.
> 
> ...


This is how I did it:

http://www.getrichslowly.org/blog/2010/03/01/how-much-life-insurance-do-you-really-need/

The problem is that there is a big difference in life insurance needs if one spouse dies vs if both parents die.

If one spouse dies - maybe the survivor would like to keep the house and will ideally not touch the retirement savings. This potentially could require a lot of insurance if the survivor doesn't make much $$ and if there are lots of debts.

If both parents die - then the house will be sold and the retirement assets liquidated. For some families (like mine), this would provide plenty of money for the kids. 

The problem is that if you have lots of life insurance for case #1 - that just gets added to the pile for case #2 and the kids will literally have too much money.

Not sure what to do about it though.


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## OptsyEagle (Nov 29, 2009)

I would aim for about 7 times salary. There are spreadsheets that work this out, many probably on the internet, but when you are done, that is about where you will be.

I wouldn't worry too much about you both dieing. The probability that either of you die is very, very small, the probability that you both die together takes that probability to about a couple more magnitudes smaller. As the last poster said, if it happens, the financial situation can only get better.


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## SaveURFinances (Jan 15, 2011)

If your husband passes($500K), looks like you have ok coverage - it depends on your lifestyle expenses

If you pass, is two years' salary enough to pay for a full-time nanny/daycare, and a housekeeper until the kids are older teenagers? If not, you need to increase your life insurance. I would suggest you probably need more.

And regarding the recreation property - would either really want to sell it, just because the other spouse is gone? Don't you want the surviving spouse and the kids to have the best time possible in their lives when one of you is gone?

You don't know what will happen to either spouses salaries, or ability to work, in the future. Don't base your insurance on what your financial situation is today - base it on what you would want and need it to be tomorrow.


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## OhGreatGuru (May 24, 2009)

Plugging Along said:


> ...
> What I'm trying to figure out is if I really need life insurance or not. If so, how much?
> 
> Some facts/stats:
> ...


As others have stated, insurance is for the benefit of your dependents, not you, so it is not a lose-lose situation.

With current income levels roughly equal between spouses, it would seem to make sense to have roughly equal insurance, so that whichever spouse dies, the survivors would be left in equally comfortable circumstances. (You have not indicated if there is any significant difference in your accumulated pension/RRSP benefits - that needs to be considered too.) Term insurance for a healthy adult until your children reach their majority should not be very expensive. 

OTOH, given the assets you have accumulated on your current incomes, it is possible that your incomes sufficiently exceed your needs that surviving on one salary plus the insurance you currently have would not be a hardship. Only you can do the math on that.


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## Plugging Along (Jan 3, 2011)

OhGreatGuru said:


> (You have not indicated if there is any significant difference in your accumulated pension/RRSP benefits - that needs to be considered too.)
> 
> OTOH, given the assets you have accumulated on your current incomes, it is possible that your incomes sufficiently exceed your needs that surviving on one salary plus the insurance you currently have would not be a hardship. Only you can do the math on that.


Our retirementment funds aren't too far apart, but mine is higher. How does this take get taken in consideration??


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## MoneyGal (Apr 24, 2009)

Here's a slightly different point of view, for what it's worth: many people, when considering how they are going to provide for their kids financially (whether in the event of their death or not), contemplate a horizon that is longer than their kids' post-secondary education. 

Think of it this way. If you are alive after your kids finish university (presuming they go, etc.), you may have new financial goals for your kids - and *their* kids. For example, sometimes parents want to help their kids with the purchase of a home. Or, they want to help with their grandchildren's post-secondary education...or they want to leave a financial legacy - with no specific purpose - to their descendants. 

All of these goals imply a legacy that extends beyond getting a child or children through post-secondary education. 

I'm not suggesting there is a "right" or a "wrong" way to approach this. I was just slightly surprised to read (several times, I think) that your goals are to provide for your children's education. I wanted to suggest thinking about a longer or larger horizon (purely as a point of discussion).


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## Plugging Along (Jan 3, 2011)

I agree with your point about provided for our kids future well beyond post secordary. As our assets current stand, if both of die, they will have this without further insurance. My issue is giving them too much. This is just my point of view, assuming we die before they are fully independant, then I think given someone who has not had full financial education yet, can be a detriment to work ethic, and drive. We have some provisions we are planning to put in our will for this. 

The part I was trying to figure out is if only one of us dies, the other can survive relatively well on one income. Of course they would suffer a little losing 1/2 the income coming in, but we always had it so we could survive on one income. The issue as others have pointed out, is that they would be a slight change in living standards.

The original insurance quotes I'm getting, are about 20X our salaries. This would leave the kids millions when we pass away. Seems too much too me.


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## MoneyGal (Apr 24, 2009)

You're under no obligation to buy that much.  I have nowhere near 20x salary. However, I'm mid-career and on my way to being self-insured.


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## Sustainable PF (Nov 5, 2010)

hystat said:


> you need life insurance.
> Anyone inheriting your children should be awarded the means to support them in a manner you want them raised in.
> Doesn't matter if Donald Trump is the new guardian, the kids should come with their own care package in my opinion.


If OP and wife were to die they'd have $500k + 2x OP's Salary + RRSP and non-registered investments + a house to sell, perhaps a recreational property to sell as well.

Unless your income property mortgage is over $1mil I think you're fine. 

Just make sure you have a detailed will so most of your assets are held in trust for your kids.


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## Plugging Along (Jan 3, 2011)

Thanks for the all the answers. I think we're actually in pretty good shape. I may get a little bit more insurance so spouse can get over grieving over me a little bit more quickly 

I was mostly worried about the kids, and from the responses, they are well taken care of. 

Now I just have to get my will officially done up.


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## OhGreatGuru (May 24, 2009)

Plugging Along said:


> Our retirementment funds aren't too far apart, but mine is higher. How does this take get taken in consideration??


It makes a difference looking down the road at what future retirement income may be. Typical survivor's allowance for a DB pension is only 50-60% of the full pension: plus you have to account for the loss of future contributory years. Will survivor have sufficient earning power to save enough for a comfortable retirement, after also assuming sole burdent of cost for raising children, paying mortgage, etc?


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## SARGuy (Feb 8, 2011)

In one of your posts you mentioned that you spend approx $3,500 per month on your children's needs such as private school, daycare, RESP, etc..... For a mere $200 per month you can provide considerable additional coverage for your kids. Or what ever amount is affordable.

To look at it another way how much do you pay for car, house, cottage, rental properties, employment insurances every year/month?

Consider it a mere increase in total insurances your pay every year....

Also make sure your will's reflect your current wish's, such as guardianship, trust admin, what age to release funds. Also the unthinkables and what if's - what if the kid's develop disabilities or medical needs after your passing?

Just a little food for thought for a family with young kids


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## Robillard (Apr 11, 2009)

This is a bit of a philosophical take on life insurance, but in my opinion, there are three main purposes of life insurance:
1. To cover off specific debts, such as a mortgage in the event of death; 
2. To force one to save for a specific contingent liability that becomes payable at death, such as funeral expenses; or
3. To preserve the value of human capital not yet converted into real capital through labour. 

The main reason one needs insurance is #3. Disciplined personal saving should be adequate to meet death-related expenses described in #2. Purpose #1 doesn't matter once major debts, like mortgages, are paid off. 

In general, one needs less life insurance as they grow older since there is progressively less human capital to insure. The elderly have little human capital left that they have not yet converted into cash (by that, I mean that they have little intention of using their human capital to earn income by working). By comparison, young people with many working years ahead of them should carry lots of life insurance (and generally don't). 

So basically, if you have many working years left ahead of you, you should carry enough insurance to realize the present value of your future labour. That way, if you die prematurely, your beneficiaries will realize the full value of the income that you would have earned in your lifetime.


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## Plugging Along (Jan 3, 2011)

SARGuy said:


> In one of your posts you mentioned that you spend approx $3,500 per month on your children's needs such as private school, daycare, RESP, etc..... For a mere $200 per month you can provide considerable additional coverage for your kids. Or what ever amount is affordable.
> 
> To look at it another way how much do you pay for car, house, cottage, rental properties, employment insurances every year/month?
> 
> ...


My question was not a matter of affordability, but rather is it something that I (or my family) need. If I need it, then I will pay for it, but if I don't, then what's the point. 

I see no relevance as looking it as a part of my total insurance. Just because I pay for something else, doesn't mean I need to pay for more if it's not needed. I pay for a lot of things each month that I must pay for, it's mean I should just add more to those expenses because I already am. 

In terms of the other things regarding my kids, I have that well taken care of. The only thing I'm not sure of, is what if my kids end up with disabilities. What does one do for this? I'm not going to take out insurance on them, in case that may happen. How much more insurance would one need in case one or more of their children become disabled, and both parents have passed away? The only way I could think of planning for this is getting enough insurance for my spouse and I that would cover until our children are dead. What amount would that be? I would venture to guess it would be in the millions. Then that goes back to one of my concerns of given someone too much. 






Robillard said:


> This is a bit of a philosophical take on life insurance, but in my opinion, there are three main purposes of life insurance:
> 1. To cover off specific debts, such as a mortgage in the event of death;
> 2. To force one to save for a specific contingent liability that becomes payable at death, such as funeral expenses; or
> 3. To preserve the value of human capital not yet converted into real capital through labour.
> ...


We've already covered the first 2. The 3rd one, I'm not sure if I totatally agree. I think it's an interesting concept, however, both my spouse and i have at least 15 years (if we consider really early retirement), and possible 25 years till a 'normal' retirement. Getting that much our income seems really unneccessary, as really much of the income that we make now would be saved for our retirement, and since we would be dead, we really don't that. Again, we would be looking for millions in insurance. I don't really see the point in that. My beneficiary would never realized all of my income while I am alive, so why when I'm dead? 

I still think insurance is to protect your family against financial hardship if you were to die unexpectedly, not raise their social economic status through an inheritance. I really don't want my kids or spouse knocking me off for an insurance payout


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## Karen (Jul 24, 2010)

Another thing to consider is to make sure that you don't leave the decision too late. I tried to buy life insurance about 20 years ago (in my late 40s) but I was turned down by the insurance company because I had developed a serious heart problem by that time. So I can see an argument for buying insurance while you're young and in good health, just to lock it in. You can always cancel it later if your net worth reaches an amount which will be adequate for your family's needs, but you can't assume that you'll be able to buy it later on in life.


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## calrest (Apr 13, 2011)

I think yes. I am not an expert for this sector, but I can Life insurance is a big personal security at the moment.


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## Plugging Along (Jan 3, 2011)

I agree about the not waiting too long. I tried to buy it immediately after our daughter was born, but was denied as I had an impending surgergy coming up. It's past the 2 year waiting time, so now I've been looking into it again.

Also, our intent is that we will be fully self insured before our 50's, so hopefully age won't be an issue.


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## Jungle (Feb 17, 2010)

I know this has all been answered many posts above, but I just wanted to add my bit. I hated buying life insurnace too, until I researched it. I will only buy term and save my money, until I can self insure and cancel it. 

They way I look at it, you can be hit by a bus tomorrow, get in a car accident and die anytime. It could be completely out of your control. And this stuff does happen, when you least expect it. 

So will your family be ok financially if you die unexpected?
Now you have a chellege of getting covered due to previous medical history, so I understand it's probably going to be more expensive.


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## Karen (Jul 24, 2010)

In my case, they wouldn't insure me at any price. I have two mechanical valves and a pacemaker in my heart and they don't consider me a very good risk - I fully intend to prove them wrong, but they don't believe me!

Fortunately, I no longer need life insurance, so I haven't followed up on it for a number of years. But at the time I was rejected, I tried several other companies and was refused by them all when they heard the circumstances.


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## Plugging Along (Jan 3, 2011)

Let's look at it another way. How would you consider if you have enough assets to be self insured? Everyone's number will be different, but will be some of the considerations into your formula?

Here are the things I have factored in:
Kids - childcare cost, schooling costs, higher education costs, and some change
Funeral expenses
Mortgage (don't have any other debts) - (did not include my rental as it's has a positive cashflow)

I did not factor directly lost of income, as the above items are the areas which one income needs to cover, the other is just savings, and investments. 

So what is your amount to be self insured. Surely not everyone needs to have enough income to cover they plan to retire, plus all the other things I mentioned? Or is that what people are considering?


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## cardhu (May 26, 2009)

Plugging Along said:


> I agree about the not waiting too long. I tried to buy it immediately after our daughter was born, but was denied as I had an impending surgergy coming up. It's past the 2 year waiting time, so now I've been looking into it again.


And if you plan to take up sky-diving or base-jumping as a hobby, wait until after you’ve got the insurance established before launching. I recall being told there are a few activity/hobby/sport things that are disqualifiers for new policies, but I can’t remember what they all were.


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## Eclectic12 (Oct 20, 2010)

Plugging Along said:


> I really hate buying life insurance, as I look at it as a 'lose - lose'. If I don't use it, I lose the fees, if I do use it I've lost my life, but I do understand the reason for it.
> 
> What I'm trying to figure out is if I really need life insurance or not. If so, how much?
> 
> ...


Hmmm ... I'd suggest checking the tax implications as part of your scenarios.

For example, if both die, it is not clear if the trust is already established. I will assume that everything is currently assets instead of a existing trust. 

Based on my uncle's estate, everything was liquidated/reported as income for the year of death tax return. At the time, the maximum that income could be spread out was over two tax years - if it met the requirements of a "complicated" estate.

So, when considering the amount left to the kids, unless you have tax planning in place, your current net worth is likely much higher than the after tax estate will pass on.


BTW, this is why some high earners ($1 million + per year) buy life insurance as the proceeds are passed to the beneficiary, tax free. If it goes though the estate - it will be subject to taxes.

It's also why some people have their kids buy life insurance on their lives if the kids won't be able to cover the taxes generated when the family cottage changes hands.


Cheers


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## Plugging Along (Jan 3, 2011)

Thanks for the good points on the taxes part. We did factor that in partially. We figured if we both died, then our after tax estate would still be well over a million, with part of the money from insurance to pay the taxes, if the kids want to keep the properties. There would not be taxes on most of the assets as it's passed on through right of surviorship. 

I'm still trying to figure out what is the right amount to be self insured, or if I need more insurance.


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## Taxsaver (Jun 7, 2009)

I used to pay like $50 a month insurance when I was already insured at work, but did not know about it. I'm not surprised that I got in financial problems in those days. Fortunately, I am not the same person today.


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## donaldhumiston (Apr 26, 2011)

One or two insurances will do I believe. It does not mean you need to get all types just to make sure that kids will be taken cared for. But I also understand that it is for their future that you do what you believe is the best thing to do.


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## greeny (Jan 31, 2011)

That´s a really clearly definition. I have to share your view. 



MoneyGal said:


> I'm not suggesting there is a "right" or a "wrong" way to approach this. I was just slightly surprised to read (several times, I think) that your goals are to provide for your children's education. I wanted to suggest thinking about a longer or larger horizon (purely as a point of discussion).


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## Plugging Along (Jan 3, 2011)

Just to be clear, I wanted to make sure I get the main areas covered, and it wasn't 'just' my children's education, though that would be one of the key criteria that I did mention. In the case that both my spouse and I die, they will both be left with a decent size estate after tax that will cover more than their education, and all of their expenses. If I my spouse dies, his insurance is more than adequate to cover all of our outstanding mortgages, education, childcare, and mine salary will cover the future. I just wanted to figure out if I needed more or not.


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## Siouxie (May 11, 2011)

As someone else mentioned, my biggest concern would be if one of you became incapacitated due to long term (or terminal) illness. Would you be able to continue your lifestyle if this happened? What if one of you needed long term care (to be paid for) or worse case scenario, both?

I have critical illness insurance just for that scenario - it gives me peace of mind and is not that expensive.

There is also disability insurance...

Just my 2d worth


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## Brian Weatherdon CFP (Jan 18, 2011)

*How to evaluate basic insurance needs...*

Here, to help inquiring readers.... You can even run 
your own initial calc before speaking with insurance professional. 

The 7x or 10x annual income strategies are so impersonal except as rule-of-thumb. Who's thumb?  

Vital: What will support you having confidence and control, so you can achieve the security YOU want?  Here's how....

*Life coverage:*
Immediate $ needed for burial (is this in Canada or away?)
Immediate $ needed for mortgage(s) on principle and other properties.
Immediate $ needed for line(s) of credit, & credit card balances, leases.
Immediate $ needed for business-related debt (in separate ins. policy)
Immediate $ needed to guarantee children's future opportunities (ed. etc)
Immediate $ needed for care of other dependants (parents? etc)
Immediate $ needed for 3-6 months leave from work (FT or Part-time)
Immediate $ needed for emergency (at least $20K)
Total of immediate money required: _________________ (A)

*+ Ongoing income needs for survivors*:
What continuing income is needed for survivors' security (eg. $4500/month?)
How long is that needed? (eg. til kids are 25?; til spouse 65?; for life?)
Reduce by expenses the deceased is no longer incurring (food, clothes etc).
Reduce this by mortgages paid off (immediate needs, above).
Ensure enough income so survivor can continue saving/investing for future.
WHAT LUMP SUM INVESTED ensures cont. income net of tax & inflation.
_(This requires risk/return profile so investments match survivor's needs.)_Lump sum = _____________________ (B)


*Add (A) and (B) together. This is the total insurance need.*
(A) + (B) = $___________________

-------------
Notes:
(i) - Consider if group insurance at work is a supplement to help you, or perhaps not because you're not sure if you will continue working there, or if health could change.....so converting the group insurance could be horribly expensive. Many include only a small portion of group insurance.

(ii) - Consider your budget, if some or all of the coverage should remain in effect even if we live to 80+. Or if budget is tight, one can get all the needed life insurance at a relatively low cost (perhaps 70% lower-cost than 10 or 15 years ago).

(iii) - Someone said the spouse would sell the house. The saddest family is one who has to put the for-sale sign on the house within weeks of a death. Family is never ready to leave a home so soon, and even a desired move should generally be a year or more after losing a family member.

(iv) - Someone said the rentals could continue taking care of themselves. Could be true. What about interest rates, maintenance costs & necessary upgrades, loss of tax splitting when only 1 spouse now must claim the entire rental proceeds: don't forget such costs/losses in your calc. As insurance is inexpensive today, wouldn't it be easier to simply clear away mortgages with life insurance. Is it worthwhile being mortgage-free?

(v) - Critical illness (CI) needs can be assessed with some similar dynamics to that shown above. Is the CI need lower because the person has not died & illness is temporary? OR is CI need actually higher due to unexpected expenses related to illness, compensation for reduced income, and managing ongoing debt payments for at least 6 months to a year (etc).... 

All said, this speaks of the advantage to work with a professional whom you can trust to guide you in a process that identifies ALL THAT YOU WANT when such an event occurs in life.

Thinking about such events -- would a *magic wand *help? Only in advance! You hold the wand today, and can provide exactly what you want for the future. But when the future arrives, the magic wand must have been used in the past....which is where we're living today. Can't procrastinate! Use your magic wand today, and everything can be fine.

Yours,
BW


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## Plugging Along (Jan 3, 2011)

Thanks Brian. That was exactly the magic wand I was looking for. I think I have everything already covered, but that was a good check list.


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## Brian Weatherdon CFP (Jan 18, 2011)

Awesome..... Delighted to help 

Brian


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