Should seniors cancel their life insurance policies? – MoneySense

It’s got to be your decision. To help you decide, I will give a quick review of why purchasing insurance makes sense and the two types of insurance available. You can then relate the reason for purchasing insurance to your current need for insurance. 

Why do Canadians need life insurance

Ultimately, Canadians buy life insurance because they want to take care of others should something happen to them. They want to protect their survivor’s lifestyle or maximize the inheritance with insurance when they pass away unexpectedly, or naturally after a long, healthy and happy life.

There are two financial needs to consider when determining the amount of insurance needed: How much income would be needed, as well as current and future debts. Current debt may be a mortgage, and future debt may be children’s university expenses or future taxes.

How much life insurance would you need?

A simple method in determining the how much insurance you need to replace your income is to divide the income needed by a safe investment return.

If you need to replace an annual income of $50,000, and you think you can safely earn 5% on the invested insurance proceeds a year, then divide $50,000 by 5%. This gives you a need for $1 million of insurance, or $1 million minus your existing investments. That is earning 5% a year on a $1 million gives $50,000 a year.  

You could argue that you don’t need the $50,000 annual income replacement for life because, your expenses will be lower as you age, you will have other income such as the Canadian Pension Plan (CPP), Old Age Security (OAS), and so on. That’s all true— but this calculation does not take into consideration inflation. Over time inflation will whittle down the value of that $1 million.

Does life insurance cover debt?

Yes, and once you know how much insurance you need to replace income, then just add on the debt.

Maybe when you purchased the insurance your situation looked a bit like this: A $750,000 mortgage and anticipated post-secondary expenses of $250,000 for children, if any, means upping the insurance from $1 million to $2 million.