How much life insurance do I really need?

When members call asking for a life insurance quote, they usually fall into one of two categories: they either have a particular amount of life insurance in mind, or they have no idea how much life insurance is suitable. Either way, we perform our due diligence as insurance advisors to ensure the amount of insurance coverage we recommend is based on your specific situation, expectations, and comfort level.

There are two areas to review in a life needs analysis, the first being immediate capital needs and the second being ongoing income replacement to fund the family’s everyday living costs. 

Capital needs are relatively simple to calculate. Mortgages and other liabilities such as lines of credit are the largest contributors to capital needs. Other expenses to consider at death are burial expenses, education funding for children, and emergency funds, usually 3 months’ salary. 

The second component in calculating a suitable coverage level is in­come replacement, which can be far greater than capital needs. Many people underestimate the value of their ability to earn income. For example, $1 million of life coverage for a physician earning $200 000 net would only provide 5 years of replacement income—not long enough if the children are young. 

Calculating income replacement needs can be tricky. We usually pose this question to members: “If you died and the mortgage and liabilities were eliminated, how much income would your family re­quire to live comfortably?” Most members have difficulty answering this question. The proper amount of coverage would vary de­pending on the lifestyle and situation of each physician and his or her family. 

Does the spouse earn income or stay at home? How many children do you have and how old are they? Are there other sources of income that would continue with your passing? Do you have a high standard of living or does your family have basic lifestyle needs? Based on your answers, we can help guide you to a reasonable amount of insurance to protect your family’s lifestyle. On average, most physicians with families require $2 million to $3 million of insurance to cover capital and income replacement needs.

After assessing the required amounts of coverage, we then look at your family’s ability to self-fund some of these expenses. Most young families do not have a large liquid nest egg. Some mature families may have rental properties, investments, and savings accounts that would enable them to rely less on insurance. However, keep in mind that these assets may be required for your surviving spouse’s retirement, or perhaps you would like to pass these assets to your children. 

As well, capital assets may take time to sell, especially if market conditions are poor. So even though your family could use existing assets to fund some of the costs associated with your passing, an affordable life insurance policy may be a preferable choice. On average, a life insurance claim takes 9 business days to be paid directly to the beneficiary. 

Does everyone need life insurance? The simple answer is no. If a physician and her working husband have no debt and no children, they technically do not need life insurance. Sometimes physicians in these scenarios want to help supplement their surviving spouse’s income since they were accustomed to a certain lifestyle. 

Single people may not need insurance to support a family, but they may not want to leave parents or siblings with outstanding debts or funeral expen­ses. Older individuals may want to reduce their life insurance if their mortgage is paid and their children become financially independent. They should still consider if their spouse would need replacement income if the working physician passed away before saving enough for retirement. Also, the member may also want to consider insurance for estate and legacy planning purposes rather than for capital needs and income replacement.

It is disadvantageous to your family when you are underinsured, and it is unnecessary to be overinsured. The cost of group term insurance is very affordable, so I encourage you to speak with your insurance advisor to assess if you are adequately covered (you can contact me at 604 638-8745; 800 665-2262; jkwan@bcma.bc.ca). You should reassess your insurance needs at least every 3 years and when a major life event occurs such as marriage, having a new child, or buying a house.
—Julie Kwan, GBA, CFP, CLU
BCMA Insurance Advisor