Biggest Life Insurance Mistakes: Part 2 of 3

Part 2 of 3

This blog post is part two of a three part series. Part one can be located in the blog archives at www.mceachernfinancial.ca/blog

For most people, buying life insurance is difficult enough, even when it’s done right. But when it is done with only one eye open, or haphazardly just to ‘get it over with’, mistakes are very common, and they can be very expensive. Without question, life insurance is one of the most important purchases people make in their lifetimes, yet many people are ill-equipped to make informed decisions. Consequently, many life insurance owners express doubt, or even remorse, over their purchase. By avoiding some of the biggest mistakes that people make when buying life insurance, you can be more assured of your purchase and enjoy its peace of mind.

Mistake #2 – Not Buying the Right Amount

One of the worst feelings is wondering if you own enough life insurance, or perhaps worse, wondering if you own too much. In either case, you wind up second guessing your purchase because you don’t know if it will be enough, or you are concerned that you’re paying more than necessary to protect your family.

Determining your need for life insurance is not an art – it is a mathematical science based on known facts and realistic projections that arrive at a solid solution. You must be clear about the facts: does your family have a specific amount of debt that needs to be repaid? Do you have certain obligations such as ensuring your children will have educational opportunities? What are the specific income requirements of your family to be able to maintain their lifestyle? Do you currently have a specific amount of assets that are readily available? And does your family may have other sources of income that will be available to them after your death? You need to be very honest about the answers to these questions.

Next, you need to hypothesize about the future so that you can apply some assumptions such as the increase in the cost of living over time, and the growth rate on capital including the proceeds from life insurance. This will enable you to calculate how long your assets and life insurance proceeds will last.

You can make some assumptions as well about how long the need for life insurance will last. For instance, once your children have graduated from college they should be less dependent on your family’s income. If you have children with special needs, however, their dependency may last a while longer. You can also assume that your spouse can eventually replace your lost income with his or her own earnings; however, it is important to account for a spouse who may not have the earning capacity to do so.

Using this practical planning approach, the amount of life insurance you will want to own will be based on a real life look into the future with actual facts, your current situation, and realistic assumptions (inflation, growth rate, and needs assumptions). We will be able to aid you with your calculations as pat of our process.

Hope everyone had a great Canada Day!

Stay tuned next week for Mistake #3