How Much Life Insurance Do You Need?

Deciding how much life insurance to purchase is an important one that will provide a safety net for your survivors in the event of an untimely death. When left to their own devices, people tend to make a haphazard decision based upon their own biases regarding insurance, maybe some rules of thumb, and whatever online tool they found.

Buying too much or too little life insurance can have catastrophic financial consequences. If you buy too much, you will spend too much of your present-day cash flow paying insurance premiums for life insurance you don’t need. If you buy too little, your heirs and beneficiaries may be left in a devastating financial position. Therefore, it is essential that you buy just the right amount of life insurance. (Insert your favorite Goldilocks analogy here.)

Decide Your Life Insurance Goals
The first consideration when making any financial decision is quite simply this… what are your principles and goals? What is it you hope to achieve by purchasing life insurance? For most people the goal is to put their family on the road to financial well-being in the event of an untimely death. The purpose of life insurance is to relieve your beneficiaries of financial burdens. What does that mean? Let’s explore some ideas.

Pay off any mortgages. Mortgage balances are based upon the income level and expenses of a person, or in the case of a couple, two people. In either case, the death of an individual creates an imbalance in this equation. Therefore, paying off your mortgage, a significant long term debt obligation, is a terrific use of life insurance.

Pay off other debts. In addition to mortgages, you may want to consider all other debts that need to be paid off. For example, you may be carrying car loans, you may have sizable credit card balances, you may have personal lines of credit, or a myriad of other debt obligations. Consider adding enough life insurance to pay off all outstanding debts.

Provide income for your surviving spouse or beneficiaries. The income you provide will need to be replaced. Consider how long you would like to replace your income. It is advisable to provide at least five years of income for your survivors. You may also consider a longer time period, like 10 years or however many years until you theoretically would have lived until you retired.

The intent here is to provide enough income for the survivor to get back on their feet. At a minimum, provide enough income to allow them to reestablish themselves financially. Consider your survivor’s ability to earn income. If your survivor has not worked or earned significant income, consider a higher amount of insurance on the higher earning person.

Provide for children. Children are expensive. Consider how much the surviving parent will need to cover the cost of raising children until they are out of the home. You may want to add life insurance to cover the cost of college for each of your children, if appropriate.

An additional consideration for some parents is children there have special needs or require ongoing care. Be sure to include enough in your life insurance policy to cover the costs associated with special needs and/or ongoing care.

Extra money to smooth some of life’s bumps. Life has a way of throwing challenges our way. While life insurance is not intended to be a financial windfall for your survivors, consider adding enough value to your life insurance policy to help your survivor with life’s challenges.

Life insurance is intended to create some financial security for your family in the event of your death. There is no amount of money that can replace your  love and support. But, with life insurance, it is possible to provide financial support even when you’re gone.

How To Actually Determine Your Life Insurance Needs
First, think about your goals and principles. What is that you want to achieve? Zero debt? Income for 5 years? 10 years? College pre-paid? Maybe it’s a financial security blanket for the ones you love most. Think about what’s important to you. Think about what you want to achieve with life insurance. These thoughts will guide the next part of your decision.

Next, consider all debts. What would it take to pay off everything – every last penny – such that every single debt is completely eliminated. This includes all mortgages, loans, medical bills, credit cards, personal lines of credit….everything. At the very least, pay off mortgages, cars and credit cards. Write it all down. Roundup to the nearest $1,000.

Then, consider how much income you’ll want to provide. Ideally, you’ll want to replace the income you would have earned had you worked until retirement age. Multiply your annual salary by the number of years until your reach age 65. At a minimum, calculate a few years of your annual salary.
Consider any children living at home. How much will it cost to raise them through their college years. How much should be allowed for college costs? A good estimate is $50,000 per minor child, plus college costs. Write that down.

Will you have final expenses? Depending on your final wishes, final expenses can be as much as $10,000 or more. Don’t leave your survivors with this bill. Think about how much your final expenses might cost. Write it down.

Lastly, consider how much additional coverage to include as a lifetime gift to your beneficiaries. How much can reasonably afford to add that will help take care of some of life’s financial worries?

So, that’s…

1. All debts
2. Income
3. Children
4. Final expenses
5. A little extra

Do some quick math and you should have a decent picture of how life insurance you need. You're probably looking at a sizable figure. Please know that this figure represents a lifetime of earning and spending in a single financial transaction.  

Working With a Life Insurance Professional
The caricature of an insurance agent is the aggressive salesperson with a witty retort for every possible objection. This caricature may still exist, but most insurance agents are thoughtful people doing right by their customers. They know a good experience will lead to more business.

A good insurance agent will work with you in a comprehensive manner. Any insurance sold would only be sold as part of a comprehensive financial plan.
How do you know if you’re working with a good agent?

1. They’ll ask a lot of questions. They’ll ask about you, your family, your goals, and your principles before ever mentioning a product.
   
2. They’ll consider your entire financial picture. Any insurance solutions will only be part of a complete financial plan.
3. They’ll present insurance options that meet your needs and budget.
4. They will help you with all forms and guide you through the underwriting process.
5. They will keep in touch over the years and make sure your policy still meets your needs, and help find a better solution if it doesn’t.

Buying life insurance is an important consideration. This blog could not possibly answer all your questions. Let us know how we can help with your life insurance needs.