How much life insurance protection is enough? It’s a common question that has a number of answers. While a lost life can never be replaced, life insurance is a good way to protect the lifestyle you’ve built for you and your loved ones.
Whether you are a corporate leader or a homemaker, you are a cash resource to your family. Life insurance gives you the ability to help continue your income and gives you the comfort of knowing that your family’s financial needs can be taken care of in the event of your untimely death.
What to Consider
Typically you need life insurance if someone (spouse, children, parents, loved ones) is relying on you or your income and would be financially affected by your passing.
Many factors must be considered when determining the amount of insurance protection you need, such as your age, your medical condition, your number of dependents, your income and your current financial standing. You must also look at the big picture and consider how the loss of your income would impact the financial life of your spouse and children. In the event of your sudden death:
- Could your spouse/loved one pay the mortgage? Child care expenses?
- Would your family’s living expenses (food, clothing, utilities, transportation, emergency fund, etc.) be covered?
- Could your debts be paid?
- Would there be enough money to pay for your children’s college education?
- Will your financial expenses (such as funeral costs, medical bills, attorney fees, probate costs) be a burden to your family?
Determining How Much Protection You Need
There are several ways to determine the amount of life insurance protection you may need. Some formulas are broad while others are specific and require you to evaluate your finances and calculate your beneficiaries’ future financial needs.
Multiply your annual income between seven and 10 times. This is a basic industry rule of thumb to help you calculate the amount of life insurance you may need. While it’s important to provide life insurance for people who bring in an income, it’s equally important to have the proper amount of insurance for a spouse or loved one who doesn’t draw a salary, but has a financial impact on your family. To determine an appropriate insurance level, for example, of a spouse who stays at home with children, you should consider how much it would cost to cover your loved one’s responsibilities, such as child care and housekeeping, and multiply this number by seven to 10 times. This is a simple way to calculate coverage, but it may overlook certain individual financial factors that require you to buy more or less insurance.
Calculate salary levels from now until retirement. Using a rate of interest that shows projected salary increases, you can approximate how much income you will draw from now until retirement and insure yourself for this level. While this is an option, this method does not account for the specific needs of your beneficiaries (such as college funding, etc.).
Perform a Needs Analysis. Working with a licensed insurance professional, you can get a better picture of your financial strategy and the amount of life insurance you need through a needs analysis. While no method of calculating the amount of insurance you need is exact, this detailed method is based on a simple formula:
Short-term Needs + Long-term Needs – Resources = Amount of Life Insurance Coverage.
Short-term Needs: These are the costs that will cover your beneficiaries’ responsibilities in the event of your death. This includes outstanding debts (credit card balances, auto and student loans, etc.); emergency expenses (approximately six months of living expenses); and financial expenses such as funeral costs, medical and hospital bills, taxes, attorney and executor fees and probate costs.
Long-term Needs: Includes items such as the balance of your mortgage, college costs for your children, daily necessities for your family such as food, clothing, child care, medical expenses and coverage, and transportation (cars, etc.).
Resources: Includes liquid assets (assets that can be converted quickly to cash) such as savings, investments, (stocks, mutual funds, etc.), Social Security income, and existing life insurance (i.e., if you have a policy through work).
The figures you get using any one of these formulas may be significant, but don’t be intimidated. If the cost is too high, re-evaluate where you can allocate less money and make adjustments, but don’t put off life insurance planning altogether. Life insurance is a good way to help replace your income in the event of your death and maintain your family’s lifestyle as best as possible. A qualified and licensed insurance professional can help you determine what direction may be right for you and your family.
When looking for the right life insurance coverage, don’t hesitate to contact the experts at Donald Weiss Insurance Services. Our dedicated team is ready to assist you with all your insurance needs.