How Much Life Insurance is Needed?
June 6, 2009 |
Featured
How much insurance you need is likely the first thing that comes to mind when you are trying to decide which life insurance policy you should purchase. There is no doubt that life insurance is very important. The financial difficulty on your family could be a devastating problem if you come up with too little. If you have too much coverage, you will end up paying higher than necessary premiums for a policy you will hopefully never need to use. Finding out exactly how much coverage you need is the key to a good life insurance policy.
If you ask people for recommendations, you will likely get a huge array of answers. Many will say that in order to calculate the amount of life insurance you need, you should simply multiply your annual income by seven. Others will take the calculation a step further and say that it should be the amount needed to cover the funds required between now and the time you are ready to retire. Others will simply say that you should have enough to cover your total debt. However, this form of calculation will not always give you the best or most accurate answer to your question.
Most experts will tell you that you should simply take a ?needs analysis? to determine how much insurance you will need. This sounds fairly complicated and though it is more complex than simply multiplying your annual salary, it should give you a result that is much more accurate. Below is how you would do a ?needs analysis?.
1: Short-term Expenses
Short term expenses are expenses you would have immediately after your death. These would include medical treatment, funeral bills as well as legal expenses. It should also include any outstanding debts and maybe even emergency medical bills that may be incurred at the time of your death. You can also factor in things like car repair or anything else that you think might be a necessity.
2: Long-term Expenses
Long-term expenses generally cover a wide variety of things as well. Most people would include the home mortgage and the college tuition for children to be included as a long-term expense. Even if your children are not yet ready for college, you should look at the annual costs of colleges nearby and figure that cost into the long-term expenses. To include the increase in pricing, you can add five percent per year which is the average rate that college prices go up.
3: Everyday Expenses
You will need to factor in the everyday expenses for one year. This should include food, utilities, travel, clothing, etc. Once you’d done this, you can then multiply this number by the number of years that you wish to cover for your family.
4: Financial Resources
Many people have other resources available that might allow them to meet those expectations. For example, current salary, other savings, or investments might some things that you would have going for you in your favor. You should never include the sale of your assets such as a home in this figure.
5: Add It Up
Steps one through three should be added together. However, once you get that figure, subtract your resources (found in step 4) from that total. This should leave you with a pretty close figure as to what amount you’d need the life insurance policy to cover.
It is no huge surprise that you may have a figure that is unreasonable. It just goes to show how quickly money can be spent. However, if you simply cannot afford to have a policy for that amount, try to go back to your steps and figure out ways to reasonably cut that number down.
Regardless, even if you come up with a good number now, experts say it should be reviewed every three or four years. The reason for periodic evaluation is because people?s expenses and assets change throughout their life and these fluctuations can affect their life insurance needs.
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