How to figure your life insurance needs

Larry Cantello died a happy man, playing hockey with his buddies until a heart attack left him unconscious. It was those who loved the cheerful father of three young sons who were distraught.

Fortunately, he left his family a financial buffer—the $50,000 of life insurance he was provided as an employee of the municipal aquatic centre in Pointe-Claire, Que., plus more assets than most have at age 45.

He left a mortgage-free home near Montreal, a couple of cars, several years of pension contributions and other savings. His four siblings quickly set up an online appeal for help. Within a month, a fund for the funeral and the boys’ education was near the U.S. $20,000 target.

So Cantello’s wife Stephanie, a teacher, can afford to stay home well beyond her maternity leave. The proceeds from the insurance will be tax-free, and family expenses will now be less. Later, however, she may find a new love and ultimately remarry.

What about you? Would you leave your children and spouse with substantial assets? Have you bought enough life insurance— the cheapest and quickest way to protect them should tragedy strike? The whole point of insurance is that you never know when calamity will strike.

Several readers have written to ask how much coverage is too little, or too much. This is an impossible question to answer without detailed information and a lengthy discussion. It would be best if you prepared yourself to speak with a licensed agent or broker.

Start by estimating how much money would be needed if you were no longer in the picture. Tally your family’s current and potential expenses. (Prices do rise over time.) Compare those costs with your assets, debts and the capacity of each spouse to earn an income.

To help calculate how much insurance would fill any gaps, test-drive one or more ‘insurance needs’ calculators available on the internet. You can find them using the Google search engine or equivalents.

Some life insurers have a single calculator that estimates life, disability and critical insurance needs. None, however, estimates the chances of remarriage or the time it could take.

Your cheapest option will be term life insurance. One policy for the first partner to die will be less expensive than policies for both partners, but the latter could prove inadequate if both partners die prematurely or divorce.

Whether you choose a policy with a term of 10, 20, 25 or more years, you should look for one with the right to be converted to a decent lifetime or whole life policy, or that can be renewed at a guaranteed premium without proof of insurability.

Premiums rise after each renewal, but you always have the option to shop for cheaper coverage. Rates for initial terms have fallen in recent years. A further protection would be to have an option to stop paying premiums if you become disabled.

To explore the cost of coverage, visit winquote.net (or iCompete for iPads, or QuotesOnTap for iPhones). Prices shown vary by insurer, type of policy, age, gender, history of smoking, health status and other factors. Prices may be higher, depending on the findings during the medical underwriting process.

You’d pay less if you quit smoking for a minimum period. However, you could be denied coverage if you contract a serious infection like hepatitis or a potentially fatal disease. There may be an advantage to buying life insurance before you have dependants.

If you search for the price of a certain death benefit, don’t stop there. Test to see if the same premium would also buy more coverage. A non-smoking 30-year-old woman in average (standard) health would pay $316 per year for anywhere from $400,000 to $530,000 of coverage for 20 years.

Ami Maishlish, president of CompuOffice Software in Thornhill, Ont., explains that the cost per thousand dollars of life insurance falls as you buy more. However, beyond a certain point, prices rise again.

Set your annual insurance budget and buy the most you can reasonably afford from an insurer that is financially strong. (You can also search for insurers’ current credit ratings online.)

Note that the woman in the above example would be 69.5 by the time she saved $530,000, if she contributed $5,500 each New Year to a Tax-free Savings Account and she earned a 4% annual investment return.

You will also save on insurance if you pay premiums annually instead of monthly. Insurers charge extra for the monthly payment option—as much as paying 18.6% interest, Maishlish calculates. So look for a cheaper loan elsewhere if you prefer monthly payments.

Much more could be said about life insurance, but that will have to wait for future columns. If there are particular questions to ask, please don’t hesitate to send me suggestions by email. My coordinates are listed below.

James Daw is a journalist and Certified Financial Planner in Toronto. Email [email protected]; on Twitter he’s @jamesfdaw