To determine how much insurance you’ll need to buy today, you’ll need to know how much financial help your family will require in the future.
It’s Life Insurance Awareness Month. We thought we’d take out some of the guess work. Here’s how you can calculate how much you’ll need.
Calculating your insurance needs sounds complicated. Honestly, if you know your current income and expenses, it doesn’t have to be so daunting. That information is key to estimating how much insurance you’ll need. Without it, the dollar amount of coverage you select may be too much or too little.
People tend to focus on the obvious sources of income. They often fail to include other assets that may also need replacing. Calculating an accurate estimate is important in determining how much is needed.
Calculating your estimated future income
The amount of life insurance you need depends upon how much financial help your family will require in the future. This includes your mortgage, monthly utility bills, car payment, and other financial obligations. If you’re using budgeting software, you could easily estimate the amount of your regular monthly spending.
It’s critical, though, not to be short sighted. When you think of future expenses, you should consider major life changes. Will your family relocate? Will your spouse go back to school to better provide for the family? Do your children plan to go to college? Will your spouse have enough money to retire? These are expensive life events, but if you’ve planned for them, you’ve already helped your family over the first hurdle.
People often overlook employer-sponsored benefits as potential income to be replaced. Think about your health insurance and dental premiums and your matching 401(k) contribution. They’re not reflected in your gross income, but, losing them would be a financial blow. It could cause your family to incur additional expenses. What other perks does your company offer that have financial value?
Finally, you also need to plan for expenses resulting from your death. Funeral costs, taxes, and administrative fees to process your estate can be expensive. Not everyone has the cash on hand to pay these bills. At a time when your family is grieving, they shouldn’t be worrying over finances.
Subtract other sources of income
Are there other sources of after-death income that could offset your insurance needs calculation? Social security survivor’s benefits might be one. You may also have additional coverage through your employer or another entity. These sources could affect the amount of the individual life insurance policy you purchase.
Meeting your family’s future needs is one of the most important parts of a well-rounded financial plan. When you can accurately estimate your survivors’ future financial needs, you’ve conquered the most difficult part of the planning process. Speak with an insurance agent who can review your goals and discuss products that will protect your family’s financial health. Not only will it help you find security in today, you’ll worry less about tomorrow.
1 “2015 Insurance Barometer Study.” LIMRA and LifeHappens.org. Apr. 14, 2015.