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Most Canadian families are looking to purchase life insurance to maintain their family’s standard of living when they pass away. What does that mean? What’s the standard of living? For most of us, our standard of living is based on our income. We go out to work, we earn a paycheque, we bring it home and spend it, and spending it is in fact our standard of living.
Basic, fundamental life insurance principles make it clear that for life insurance to make sense, we need to have a catastrophic financial loss. And in that situation, where’s the catastrophic financial loss? Is it our mortgage? Is it our savings? It’s none of those. Those aren’t losses.
The financial loss upon our death for most of us is the loss of our income and therefore our lifestyle over a long period of time. So your income over a long period of time is in fact a catastrophic financial loss and that tells us that you should be insuring loss, not debt.
So what you want to do is look at your income, determine how much of that income is needed to be replaced to maintain your family’s standard of living, determine how long they need that for, and then run a calculation that says for me to produce this level of income for this number of years, how much life insurance do I need? And there’s a calculator that does exactly that on the homepage of thetermguy.ca. What it will do is, given those parameters, it will show you that if you purchase a million dollars of life insurance, your family can draw that down every year over the time period that you specified. And at the end of the time period, there’s no money left.