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- How much life insurance do I need?
- October 3, 2013 7:07 PM
Determining the appropriate amount of life insurance can seem like an overwhelming task due to unpredictable investments, job markets and the general subject matter, which is perhaps why most people delay purchasing a policy
But it’s necessary to do so in order to ensure the protection of your loved ones, if something were to happen to you or your another family breadwinner. The good news is that determining the appropriate amount of life insurance is not as hard as one might think. As a starting point, most financial planners recommend no less than ten times the breadwinner’s annual income.
According to the LIFE Foundation, it isn’t really how much life insurance you need, it’s how much money you family will need after you’re gone. Think about the lost income and what it would have brought to the family had the breadwinner or caretaker not died.
They advise you to ask yourself the following questions before purchasing a policy:
• How much money will your family need after your death to meet immediate expenses, life funeral expenses and debts?
• How much money will your family need to maintain their standard of living over the long run?
Life insurance proceeds, which are payable in a lump sum or over time at the election of the beneficiary, can be used to pay immediate expenses, such as medical costs, final estate settlement, funeral expenses, taxes, debts and mortgages. They can also help your family cover future financial obligations like everyday living expenses, college tuition, retirement and much more.
There are several things to take into consideration when purchasing a life insurance policy, according to the industry’s bible, “McGill’s Life Insurance” by Edward E. Graves:
Premium dollars available
The financial objective and the amount of death benefit
As a cross-check to the simple formulas, , it’s also recommended to use a life insurance needs calculator or consult a financial planner.
If you are the type to make lists, here are some handy categories to think about:
• Medical and hospital expenses
• Burial/funeral expenses
• Attorney/executors expenses
• Probate court expenses
• State death taxes
• Federal estate taxes
• Credit cards
• Car payments
• Student loans
• Home repairs
• Medical expenses
Mortgage/rent payment fund
• Mortgage payoff
• Rent (Equal to 120 percent of rent payments made over 10 years)
Child/home care fund (provided until the child reaches the age of 18)
• Home and car repairs
Educational and vocational fund
• Surviving children’s education
An approximate evaluation of the surviving spouse’s annual income requirements over their remaining life expectancy should include:
• Taxes, after-tax earnings
• Inflation percentage
• Social security benefits
• Other sources of income
• Providing capital (capital that your spouse and heirs will receive)
When you consider how much life insurance to purchase, know what’s in the following documents:
• Life insurance policies you already have
• Receipts, dependent care expenses
• Most recent income tax form
• Credit card billing statements
There are also a few factors to keep in mind when going through a needs analysis.
The beauty of owning private life insurance is that you do not need to worry about what is called a “blackout period” under Social Security benefit schedules, which is an adjustment for the loss of social security benefits that occurs when the youngest child leaves the nest.
In addition to that, Social Security has a reduction in benefits after the surviving spouse reaches the age of 60.
Remember, as you get older and experience new life events your insurance needs will change so its best to review your policy at a minimum every two to three years or when you experience a life changing event such as purchasing a home, having a child or going through a divorce.
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