Dear Caroline, I'm 35 and I just had my first child about six months ago. A friend of mine was telling me she just got a life insurance policy - is this something I should have? And if so, how much should I be covered for? Thanks, Sherry (Kelowna, BC)
Kids are game changers when it comes to insurance. The light went on for me around the time my son turned one and I was packing to go on my first work trip out of town. I started wondering how my family would cope financially if I died. It's a question I never had to ask when I was single and childless.
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You didn't mention whether or not you are a breadwinner in your family - if you are then you should definitely consider getting life insurance. Even if you are a full-time, stay-at-home mom, many financial planners would recommend that you get life insurance to cover the cost of replacing your role as a caregiver - childcare isn't cheap and any added costs could put pressure on your family if you die.
The whole point of life insurance is to make sure your family remains financially secure if something were to happen to you. So assuming you do need life insurance, there are a couple of things you have to figure out. First, how much do you need? To find out, ask yourself these questions:
1.How much money would you need to pay off all your family's debts (mortgage, lines of credit etc)?
2. How much would your funeral cost? Your insurance policy should make sure your family isn't stuck with any debts or added costs.
3. How much do your kids need for ongoing care and education?
4. How much of an income do you want to leave to your family to cover expenses in the future?
5. How much can you afford to pay on a monthly basis for your insurance policy?
Figuring out how much you need is a balance between numbers 1 to 4 and number 5 - how much can you afford to pay on a monthly basis to carry a policy? Sure, we'd all love to give our loved ones a $10 million windfall when we die, but can you afford to carry a policy like that?
Which brings us to my second point - what kind of insurance you need? This usually boils down to a choice between term or permanent insurance. Term is the most popular choice because it's cheaper - you pay for a fixed premium that covers you for a specific period or term (10 to 20 years). Permanent policies are more expensive because they cover you for the rest of your life (Dan Bortolotti's article in MoneySense is a great overview of the pros and cons of each type).
So, Sherry, I would recommend you start thinking about life insurance not just for you but for your significant other as well. To help you further, here are a two more places where you can get more information:
Insurance basics from the Investor Education Fund
Moneyville has a good life insurance calculator to help you figure out how much you need.
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