How Much Life Insurance do you need and a simple way to calculate it.

November 16, 2012 at 6:36 pm Leave a comment

Hello All,
Figuring out how much life insurance you should purchase can be a complicated process; no matter what shortcut strategies like multiplying your income imply.  More goes into planning than just your annual salary. You want to find the middle ground; insurance coverage that will meet the needs of your loved ones, that has an affordable premium payment and that is not far in excess of what you truly need.
A simple way to figure how much insurance coverage you should shop for is to take into account four main categories of financial need, in addition to some other contingencies.  These categories are income replacement, debt, final expenses, and education expenses for your children.
Your family’s most immediate need will be the money to cover the expenses of your final arrangements.  Whether you decide in advance not to have a service there will be costs for burial or cremation.  This cost can exceed $20,000.    Make sure that if you want something lavish to celebrate your life after you are gone that you plan for the extra cost.  The benefit of using insurance coverage for this is that beneficiaries are usually allowed quick access to part or all of the policy.
You need to take into account your debts.  These need to include the mortgage or rent on the home you live in now and the likelihood of that expense increasing over time.  Include loan payments such as student loans, credit card balances, and car loans.   Even if your beneficiaries do not decide to sell the home they will need the money to cover the payments each month.  This will ensure a home for them to live in long-term.
After debts have been paid off and final expenses have been met your family should not need your full annual salary but a portion of it.  It is important that you take into account the replacement of your income. Usually this amounts to about 50%-60% of your pre-tax income.
The thought of college expenses is very overwhelming whether you have one child, three or even more.  You need to plan for an estimated cost of college once your children reach 18.  Over the past 20 years tuition at most colleges both public and private has nearly tripled.  Remember to include this amount of money for each of your children.
You need to total the amounts for each category and combine them to get an estimate of your insurance needs.  Medical problems, spousal income, a paid off home, and more will figure into exactly what your needs will be. You also need to consider how long you want the coverage to last.  If you are most worried about covering the expenses of your children growing to adulthood you might consider a 20 year term policy.  If you want to ensure that your spouse and children receive death benefits when they are independent adults you will want to check into a whole-life policy.
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