Not too hot – not too cold – but just right!  Unlike in the Goldilocks fairytale, most people don’t get it “just right” when it comes to insurance. Most of us are either under-insured or over-insured. Yes, over-insured!

So, let’s start with how much life insurance your family truly needs. If either you or your spouse dies, would the survivor(s) have sufficient means to:

• Pay off debts
• Maintain their lifestyle and continue to save for the future;
• Pay added expenses, such as funeral arrangement, legal or estate tax bills.

If your family has the financial capacity to cover the above (make sure you go through the exercise for each spouse), then you likely don’t need insurance at all. If you don’t, then you’ll need to buy life insurance.

Your insurance needs are generally highest when you are just starting out with your career and family. Typically insurance needs gradually taper off as debt is paid down and assets are accumulated.

(While there are some specific reasons for holding life insurance throughout your entire lifetime (eg. business succession, transferring cottage assets to family members, dependents with special needs), these insurance needs are less common, more specialized and will definitely require individualized professional advice.)

Too little insurance:
Typically younger people don’t have enough insurance, and often it is the wrong kind.  Usually we need a lot more insurance at the beginning of our careers, when children are young and especially if one parent stays at home. Term insurance generally works best here – it’s cheap and exactly suited to this type of need. However, with little understanding of insurance and the ever increasing complexity of insurance options, many younger people are talked into universal life policies that don’t match the reality of their lifelong needs. These insurance policies are also touted as savings vehicles, but as far as I’m concerned, they are unnecessary, expensive and too complicated for the average family.

Too much insurance:
What I’m seeing lately are many people in their 50’s or 60’s who put their insurance plans into place early on, but haven’t recently updated them. Since their last insurance review, their debts are much lower or paid off entirely, savings and investments have increased and, with kids now out on their own, household expenses are substantially lower. With these life changes, there may be little or no need for continuing to pay insurance premiums.

So, if the kids are relatively self-sufficient, if one income is now enough to live on, or if you have accumulated enough assets, then it’s time to revisit your insurance policies.  Remember that term insurance premiums increase with age, so you may be getting the double whammy of paying more for coverage you don’t actually need anymore. I just went through this analysis with some clients and it saved them over $4,000 a year!

Just the right amount:
Take a few minutes to review your insurance coverage. Be realistic about your current circumstances and needs and your future requirements. (And don’t be pressured by those darned “bears” into paying for more insurance than you really need.) Determine exactly what the correct balance is for you and your family at this specific stage of your life. After all, it needs to be “just right”! – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.