Posted by Tim Stobbs on April 27, 2009
Right now you are slowly dying. The key word in that sentence is: slowly. Death is something people shy away from but when it comes to personal finance and retirement planning facing certain realities is a good idea.
Life insurance is not a fun topic to discuss with anyone, but the question becomes do you want to die without it? If you are single and have no debt, then the reality is you likely don’t need much if any life insurance. If, on the other hand, you have a few kids and/or a spouse who partly depends on your income you will want to consider having some life insurance to protect them in case your life is suddenly cut short.
Generally speaking term life insurance is the best bang for your buck for the majority of people. Shop around for prices as they can vary by a lot. Also consider dumping your mortgage insurance from your bank if you have it. My experience has been that it is expensive coverage compared to what you can find elsewhere.
How much you need is highly dependent on your lifestyle (spending), what you want your kids to do (ie: post secondary education), and what your spouse and you have for income and what other coverage you already have.
For example, with my wife and I we decided to take the difference between my wife’s daycare income and our spending and times it over 18 years and then times it out to get a rough estimate. Since our spending also contains an amount for RESP contributions we decided that was enough for the boys education. Then we deducted what I already have for coverage and bought insurance for the remaining amount. Then for my wife we just made that amount equal to my coverage to give me the option of working part time while the kids were young if she died.
In retirement planning you do need an estimate of your death, unless you are planning to leave a large pool of money to your kids. If that is the case you might not actually need an end date to do a plan since you can just plan to live off the interest and dividends and not touch the capital.
For everyone else you do need to pick a death year to plan how long your money should last. That year is often based on either a wild guess on the conservative side, typically age 95 or even 100. Or you can do a bit more research into when you expect to die and try to come up with a better estimate. After all there is an entire science to planning when people are going to die, how else do you think insurance companies issue annuities?
The trade off of picking a conservative date versus a bit more detail is the standard one. If you lean to the conservative side you have to save more and work longer than actually required. If you lean too far to the other side you can run out of money or have to face a reduced standard of living if you live past your planned death year.
So what did you pick for your death year in your retirement plan? I picked 95, but I’m in good health, don’t smoke and my grandparents all lived well into their 80’s.