Is Your Life Insurance Up To Date?

With all of the changes going on in our lives over the past few years I’ve been thinking a lot about life insurance, specifically about how much life insurance is enough?  Raising a family on a single income is tough enough, and I couldn’t imagine how devastating it would be if one of us were to pass away prematurely.

How Much Is Enough?

Now that we are taking on a larger mortgage this summer I feel that we need to take a look at our overall financial picture and get our life insurance needs up to date.
I’m a big proponent of buying term insurance and renewing it every 5 to 10 years to match your financial situation at the time.  Hopefully by the time our kids are grown-up and we are mortgage free then we can become “self-insured” or at least scale back on our coverage.
The group life insurance coverage through my employer is for 2.5 times my annual salary.  Let’s say for this example that my salary is $85,000.  That would put my total life insurance coverage at $212,500.  That doesn’t sound like a lot now, does it?

Calculating Your Insurance Needs

The common industry standard for a single income family is that we would need to replace 80% of my salary to maintain our current lifestyle.  That’s a good start, but for how many years do we need to replace that income?  Until our kids have left the house and are financially secure?  In that case our daughter just turned 2 and we would like to have another baby in the near future, so let’s say 20 years.
Now you can see why I’ve been thinking about increasing my life insurance policy.  It’s pretty apparent that $212,500 is not going to be enough to sustain our family for 20 years if something should happen to me.
I plugged those numbers into an insurance calculator and was a bit shocked by the amount that came up.  $1,200,000.  That’s nearly 6 times what my current life insurance policy is covering.  But hold on a minute, this calculation is only taking into account a replacement of income and is using a generic rule of thumb to apply to the average person (80% of income).

Assess Your Own Situation

Every situation is unique, and in our case we have a very high savings rate.  I contribute just over 11% of my salary to a defined benefit pension plan, and we manage to save an additional $1,000 per month on top of that.  That’s about 25% of our gross income. We have no debts outside of our mortgage.
So when we take our savings rate into account, I would change the replacement income estimate down to 55% of my salary.  When I plugged those numbers into the insurance calculator the amount came to $780,000.  That is still over 3.5 times what my current policy is covering, but it sounds a bit more realistic for our situation.
Like many Canadians, I could very well be underestimating our life insurance needs and overestimating our ability to become self insured in 10-20 years.  The nice thing about term insurance is that it’s fairly cheap and when the term expires we can re-evaluate our insurance needs and renew as we see fit.
Has a change in lifestyle caused you to re-think your life insurance needs?  How much is enough for you?