We’re going to look at three categories for families, income earning parents, non-income earning parents, and children.
For most families, the primary concern is protecting your family’s lifestyle in the event of your death. The cheapest and therefore best way of covering this concern in Canada is with term life insurance for approximately 10-15 times the gross annual income of the income earning parent. So if you’re earning $50,000/year, then you should consider $500,000-$750,000 of term life insurance.
For non-income earning parents, to get an estimate of the coverage amount and type, we attempt to assign the value of their ‘household’ work, or estimate a replacement cost. So for example we might say that childcare would cost $15,000/year, and household duties would cost another $10,000/year, so therefore the ‘income’ equivalent of the non-income earning parent would be $25,000/year. We would then do the same as the income earning parent, and consider term life insurance for 10-15 times the $25,000.
For children, the common internet argument is that ‘children don’t earn an income so therefore they don’t need life insurance’. However this is incorrect, because it’s not the child’s income you should consider insuring – it’s yours. The insurance, while the child is young, would be to cover your lost income due to a sabbatical from work. The second reason to purchase life insurance on children is to guarantee future insurability – if you purchase a child’s policy now and they later become uninsurable, at least they will always have the coverage you purchased before they became uninsurable. In this case you’re less focused on the life insurance for ‘insurance now’, and more looking at really just paying the premiums on the insurance now, so that it’s guaranteed to be there later no matter what (since you already bought it and it’s in force, it can’t be taken away). The best type of coverage for children therefore would be permanent life insurance that is fully guaranteed and level for life – often a guaranteed whole life or guaranteed universal life. If you’re concerned about guaranteeing their insurability, then you might also consider a whole life policy with dividends used to purchase additional insurance (called PUA’s). Dividends are a non-guaranteed benefit in some whole life policies that basically produce a small stream of revenue from the policy – and that small stream of income can be set up to purchase small additional amounts of life insurance automatically each year. This ensures that if they become uninsurable, their life insurance coverage will still increase each year – since while the value of the PUA’s each year are not guaranteed, the fact that the additional insurance each year is added to the policy each year is guaranteed.