How much term insurance do you need?

By Bruce Firestone | Business Coaching

May 24

As readers of this blog will already know, I am not much of a believer in life insurance–it’s costly and its financial returns are low.

Still, if you have a family to take care of and debts to pay (like, say, mortgage balances), term insurance might be a better choice.

For a healthy non-smoker in her/his 40s, term insurance is (relatively) inexpensive. But how much is enough? And what is term insurance anyway?

I have term insurance, something called term 95, which means there is a fixed (tax-free) payout to my spouse or estate when I pass away, as long as that happens before my 95th birthday. It’s why I tell my kids my goal is to live to 94.5 years of age…

The amount I pay for this insurance is fixed–it never changes even as I age, but I must pay it every month (without ever missing a single payment) for it to remain valid.

A coaching client of mine asked me recently: “How do we figure out the amount of term insurance we need? Is this an arbitrary number or a percentage of our current income?”

To which I answered as follows–

That is a very good question. In its simplest interpretation, I would NOT take any insurance from a bank or lender for say your mortgage debt. A coaching client of mine calculated that bank insurance costs are about 3x more expensive than term insurance.

So, let’s say you or a client of yours owns his/her own home plus 4 rental properties worth in total 5 x $600,000 or $3,000,000. Let’s say s/he has paid off 1/3 of that, so they owe mortgage lenders $2,000,000.

I would takeout $2,000,000 worth of term insurance so that the surviving spouse would have enough to pay off those mortgages.

Here’s another calculation: Say you or a client own your principal residence and 1 rental for a total of 2 x $600,000 or $1.2 million with again 1/3 paid off so mortgage balances of about $800,000. I’d still probably takeout term insurance of $2 million, which would allow the surviving spouse to pay off those mortgages and either have enough to live on (maybe) or (better yet) buy some added real estate to bolster their retirement income.

For a healthy, non-smoking man in his 40s, term insurance (term 95) would probably cost about $400 to $500 a month for $2 million from a reputable insurance company; a woman might be a bit less (they tend to live longer than men). As long as you keep those payments up, your rates never change. And as long as you die before 95, your spouse (or estate) gets that money tax-free. If you die after 95, your spouse or estate gets zip, which is why my personal goal is to live to 94.5 😊

At the end of the day, it’s like so many things—a judgment call.

Regards, Bruce

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
1-613-762-8884
bruce.firestone@century21.ca
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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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