This is likely not a question that you have ever thought about, but it is definitely something to consider. Life insurance is generally used for two purposes and we will concentrate on the second one for this question.
Purpose 1: Estate Planning
This includes making sure your estate will have enough money to pay bills including taxes and to alleviate the distribution of your net worth to your heirs. It is much easier to split up cash then it is to split up real estate.
Purpose 2: Financial Protection for your Family
This is the reason most people buy life insurance. If something were to happen to you, would your family have enough money to live the lifestyle they are accustomed to? If they are currently dependent on your ability to earn money, then you should have protection against your potential death. At some point, most people plan to be self-insured. This means that they have enough money or assets to cover their families financial need should the individual die. Once this status is achieved, life insurance for family protection is no longer required. Life insurance is also no longer necessary if no one is dependent on your income.
Every situation is unique and needs to be examined on its own merit but here’s an example of a case I came across last year. A married couple in their early 50s with the wife not able to work and the husband laid off from his $200,000 per year job. Their two children had moved out of home and were no longer financial dependent on their parents. The husband and wife both had whole life insurance policies that they purchased when the kids were young. They were paying around $700 for about $100,000 in whole life coverage on each of them. They had about $225,000 in debt.
Recommendations and Results
I recommended they replace their whole life policies with a $250,000 20-year term policy for each of them. The cost of the recommended policies was about $300 per month which saved them $400 per month. Once they replaced the policies and cancelled their existing policy, they received a cheque for $15,000 from the old insurance company. That was the amount of the cash surrender value that they had accumulated in the whole life policy.
By taking a good look at their current insurance policies when they were in a financial crisis, this couple was able to cut their monthly costs by $400, received $15,000 and had over twice as much coverage for the next 20 years.
Calculate Your Insurance Needs
There are online calculators you can use to see how much coverage you “should” have. The one I use is from Manulife at insureright.ca. This is just a quick calculator and does not necessarily include all the relevant information. Because of this, I always recommend speaking to your financial advisor to review your situation every year and when there is a significant change to your financial situation.