One of the greatest financial risks a family can face is the death of its primary income earner. However, despite the often disastrous effects this can have on the standard of living of those left behind, many primary income earners are reluctant to properly address their families insurance needs.
Most often it is a reluctance to contemplate their own mortality which leads many to ignore this issue altogether. As a result the extra effort to properly determine the required level of life insurance coverage needed to secure their family's future well-being is not taken. In many cases it is a reliance on their own intuition, rather than a proper insurance needs analysis, which can leave their families vulnerable in the event of their death.
Consider the value you receive for your life insurance premium. What this premium buys is protection for your family from the financial consequences of having your income stream lost to them. Instead of your family absorbing this risk, life insurance effectively transfers that risk to the insurance company. While you hope you will not need to use this coverage, having it in place, just as having a Will and Power of Attorney, will offer peace of mind particularly for those with young children, a heavy debt load or for those who own a business.
A comprehensive insurance needs analysis is the only true means to be sure your family has adequate life insurance protection in the event of your death. This analysis compares your family's future income requirements (typically this ranges from 70 per cent to 80 per cent of the pre-death income) to maintain an acceptable standard of living, to the future expected income (including the remaining spouse's future earnings and other sources of income) in the event of death. The needs analysis will also take a detailed look at your immediate expenses (funeral, time off work, income taxes and probate fees payable) and the payments required to pay off items such as an outstanding mortgage, deferred income taxes on a cottage and a university education for your children.
The length of time over which this level of income is required and adjustments for inflation also play an important role in determining the income, which will be required. Once calculated, the family's future income requirements and future expected income are compared to arrive at either a surplus or shortfall. By subtracting this figure (in the case of a shortfall) from your net assets that would be available to support the family, you will arrive at the amount of income replacement insurance required. You may also want to consider taking out a life insurance policy on a spouse who takes care of the children, aging relatives, or the home since these services would likely have to be paid for in the future in the event that spouse died.
Consider the type of insurance you will need. Term insurance, generally the least expensive form of insurance, is typically used for temporary needs including mortgage coverage or until your children have reached an age where they are no longer financially dependent on you. Permanent insurance, such as universal life and whole life on the other hand, is used when the need is permanent such as in the case of estate planning purposes.
It is important to review your insurance coverage requirements periodically since many things will change over time. When you are applying for life insurance coverage, consider not only the cost but the stability of the insurance company and ensure that the insurance professional you deal with provides you with an insurance needs analysis to support the recommended level of coverage.
Darryl Prociuk B.Comm(hons)CFP, R.F.P.,CLU,TEP is a Registered Financial Planner and may be reached at [email protected].
