What is your biggest asset?
If you’re like most young Canadians, it isn’t your car, or your watch. Nor is it your potential inheritance or even your home.
It’s actually your earning potential.
Income Replacement
If you’re making $100,000 a year, then you’re in line to earn $2 million over the next 20 years.
That’s not accounting for inflation, future raises, and of course taxes, but we can get a pretty good estimate with some simple math.
Your life (and that of your family) is built on the assumption that you’ve got that money coming in. You will use it to finance your lifestyle. It provides for your spouse and your kids. You will use that money to pay your mortgage, and to save for retirement.
Life Insurance comes in first and foremost to cover the risk that unfortunately you may be unable to collect that potential income.
This is the concept of Insurance as income replacement.
The Numbers
To calculate what’s appropriate, or how much income needs to be replaced, we use a relatively simple formula as part of a needs analysis.
We can calculate a direct sum, ie $100,000 over 20 years = $2,000,00
We can also use an alternative method, where the insurance money is invested, and your beneficiaries collect the investment income every year.
It’s a bit more complicated but If we assume a 5% rate of return every year and we need $100,000 – We can calculate the need by the formula $100,000 = %5 of x. Which in this instance just happens to bring us back to that $2 million figure.
Expressed differently: $2M x 0.05 = $100K
In Sum
The math can be a bit scary, but that’s why we’re here! There is inflation, taxes, and potential life changes to consider (kids, mortgages, legacy planning). As well as unknown possibilities and variable rates of return.
In the end though, what matters is getting in the ballpark, a number for what would be considered “ fully insured”. We then can tailor that number to your specific circumstances. This is how we determine what coverage is right for you.
Have questions or want to know what your number is? Reach out at citroninsurance.com
There is never any fee for consultations.
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