Purchasing a life insurance policy is a very important decision. One of the first things to consider is how much insurance is adequate. No one wants to have their family members bear the burden of extra expenses and have to deal with a sudden loss of income. This can be a devastating blow that one doesn’t need to endure after the shock of a loved one’s death. It can be overwhelming to find out that the amount of insurance purchased isn’t enough to pay for the expenses related to a funeral, or worse yet, isn’t sufficient enough to provide lasting income for surviving family members.
So how is the amount of insurance needed to purchase determined? There are a few steps that must be reviewed before coming to this final decision. Upon the insured’s death, there is an immediate and sudden loss of their potential income. This, of course, impacts the amount of cash flow entering the household. Bills, mortgage, rent, and other necessities will not be able to be paid in a timely manner. This potential loss needs to be factored into the policy amount in case of death. The income must be compared to the total expenses that the household faces. By subtracting the expenses form all income, it is easy to determine the amount required.
On top of this, an applicant needs to consider any future needs that may come up. If there are dependants, once these children finish their schooling, they may desire to attend a post secondary institution. The costs of tuition are immense and seem to increase on a regular basis. By factoring this into the final amount of life insurance, the applicant will not have to worry about their child’s future. Other future needs include continuing expenses. Surviving family members will require their lives to continue as planned. Bills, food, rent, mortgage; these still need to be paid in the event of an untimely passing.
In addition to the basic insurance policy, there are extra coverages that you may want to consider. Adding riders onto the insurance policy will provide these coverages, usually at an extra cost. This amount must be figured into the insurance as well.
Because the chance of being approved for an insurance policy rests mainly on the insured’s medical history, there is a coverage called guaranteed insurability that can be added on. This simply means that should the insured wish to change the policy or increase the amount of coverage, they will not have to endure another medical assessment.
A child rider may be placed on the policy as well. This should be done when the children are at a very young age. Once the child reaches the age of 16, he or she can then convert this policy and increase the coverage. The benefit of this rider is that if the child develops a serious medical condition down the road, this will not affect the policy. If they fail to purchase insurance until well into adulthood, and have diabetes, asthma, or a heart condition, they may be subject to higher insurance premiums, or may be declined insurance all together.
Many people do often live past the age of retirement. There are insurance products to cover this as well. Life insurance can pay for long term elderly care if needed. Once a person reaches an advanced age, they may need assistance to perform even the simplest of daily tasks. Because of this, they may be required to enter a care facility. With retirement comes loss of steady income and often a monthly pension isn’t sufficient enough to cover all expenses. A long term care facility can be extremely expensive and this is where life insurance can be used to ease this financial burden.
In some cases, if a person has no dependants and they have sufficient savings, they may not require much insurance or any insurance at all. They may have enough put away in a RRSP or savings account to cover the full costs of their funeral. No family members or dependants mean that there are no future costs to consider. Schooling will not have to be funded and continuing expenses will not exist.
