This is one of the most important questions when assessing one’s insurance needs.  Many people (and advisors) assume that they only need enough to cover their financial obligations (ie. Loans and mortgages).  The real number shocks many people.

Proper insurance coverage should protect your lifestyle obligations.  Financial obligations are a big part of these, but they’re not the only part.  Protecting against income loss – both current and future is critical, especially when there are dependent children.  When assessing needs, one should take into account not only current needs, but also short term future needs, ie: factor in major purchases planned in the next 5 years.

When assessing lifestyle needs, factor in financial obligations such as loans and mortgages, but also your family needs.  To assess family needs, add up your monthly family obligations: property taxes, car insurance, home insurance, electricity, gas, food, phones, etc.  Be realistic.  These bills need to be paid.  Once you know what your monthly obligations are, then factor how long these will need to be covered until children are old enough to get a job (usually after some post secondary education – early to mid 20’s).  For most families, this averages between $2000 – $3000 per month (not factoring in debt obligations).  Multiply the monthly expenses X12 (yearly amount) then multiply by number of years until children are financially independent (use the age of youngest child).  If your monthly expenses are $2500/mth and your youngest child is 5 then the calculation is $2500 X 12 X 20 = $500,000.  The ADD the total of your financial/debt obligations.  If you have a $500,000 mortgage and $50,000 in car loans add $550,000 for a total of $1,050,000.  That’s just to cover current living standards.  This doesn’t factor in inflation, education expenses, etc.  If you have some work coverages (most employer plans will have a base level of life insurance – usually one or two times base salary) then you can factor this in (deduct).

If spouses have different income levels and different work coverages, this can be factored in.  The amount of coverage for spouses does not have to be the same if there are varying income levels.  Main factor, is be realistic with the amounts to ensure the proper amounts of coverage are in place.  This calculation is for life insurance only.  Disability and Critical Illness coverages are separate.