Life Insurance - How Much Do You Really Need?

| May 05, 2015

Are you thinking about taking out a life insurance policy? Good for you. That is a smart decision. However, now you have an even more important decision. How much should the policy amount be? Let's take a look at some ways you can determine how much you need.

Debts
If anything should happen to you, it's important for your family to have enough money to pay off all the debts. After all, you won't be there to help out financially. Sit down and list all of your current debts. Make sure to include your mortgage payoff if the loan is not insured.
You also need to project your future debt. This might not be easy, but take into account if you are paying off or increasing your debts every year. How much did you owe last year, and the year before? That may give you a good idea of what to expect.

Future Income
If you want your family taken care of for many years, they will need money to make up for the loss of income. This depends on how much you make each year, and how many years your children will be minors. Plus, you also should take into consideration if your wife will be working or staying at home with the kids.

Current Assets
Do you have much money in savings at present? How about investments or retirement funds? You can subtract these amounts from the total amount needed.

Final Expenses
Your family will need money for final expenses which can include funeral and medical bills. An average funeral is about $8,000 today and you may want to add a few thousand more for other expenses.

Which Insurance Policy Do You Want?
It makes a difference when you have a whole life insurance policy. This kind of policy gradually increases in cash value. On the other hand, term life insurance is less expensive, and the budget for your monthly expenses is also very important today.

Crunching the Numbers
To make it easier, let's look at an example, and we'll use the fictional character John L. John is 35 years old with a wife and two children, ages 8 and 10. He owes $100,000 on his mortgage, $14,000 on a car, and $6500 in charge card debts. He has $2200 in savings.

John's Life Insurance Needs
1. Final expenses - $11,000
2. Mortgage - $100,000
3. Other debts - $20,500
4. Annual earnings - $53,000 (for at least 10 years)
5. Assets - $2200 plus a paid off house worth $175,000.

When you add up numbers 1 through 4 and subtract number 5, you get an amount of $659,300. This does not take into consideration things like college funds for the children, and it assumes that John's wife is going to work after the kids graduate high school. It also does not allow for inflation as John's wages are certain to go up a little bit each year, and by the year 2025, the average college education will be over $60,000 per student.
If you add another $120,000 (college for 2 kids) to the mix you then get $779,300.00. You can deduct the value of the house, but your family still needs a place to stay, so that may not be a great idea. As you can see, you may be greatly underestimating how much insurance to buy. It's important to add up all of the factors and talk to an experienced and trusted insurance person. A reputable insurance specialist is looking out for your interests and is there to help you choose the best policy and the right amount of insurance coverage.