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How To Calculate The Amount Of Life Insurance Coverage You Need
How To Calculate The Amount Of Life Insurance Coverage You Need
According to a recent study conducted by LIMRA, 30% of households in the U.S. are currently without life insurance. Even more startling, while 70% of households do have some level of coverage, half claim they need more in order to meet their needs should their primary breadwinners die.
While state laws compel motorists to carry auto insurance, no such laws require individuals to purchase life insurance. So, millions of people forgo coverage even though their families need it. Fortunately, many individuals recognize that their deaths would leave their families in financial dire straits, and take steps to provide a buffer. That's the point at which many shop around for a life insurance policy.
Before you invest in one, you'll need to calculate how much coverage your family will need in your absence. We'll help you to do so below. Whether you've recently had your first child or your grown children left the nest years ago, it's important to plan for the unthinkable. That is, how much money will your family require if you die?
Figure Out How Much Money You Owe
Most people leave behind a number of debts when they die, especially if they die earlier than expected. For example, they might have outstanding balances on their credit cards; they may owe money on their car loans; and they might owe years of payments on their mortgages. In their absence, their families must somehow come up with the means to pay everything off.
Tally the amount of money you owe creditors. Include that figure in the amount of life insurance you ultimately buy. Doing so will save your family the hassle of scrambling to pay off debts you might otherwise leave behind.
Add Up Your Monthly Expenses
The next step is to create a list of every monthly expense. Note each item and the amount you spend on it each month.
Consider your mortgage payments, utility bills, home insurance and health care premiums. Write down the monthly cost of food and clothing for your family. How much do you and your spouse spend on fuel or bus fares each month? How much do you spend on property taxes? If your children attend a private school, add in the cost of their tuition. If you live in a community that requires you to pay homeowners association fees, include that expense as well.
Make sure your list is as comprehensive as possible.
Estimate The Total Cost Of Your Monthly Expenses
After you've tallied your monthly expenses, figure out how long your family will have to pay them. For example, your mortgage will eventually be paid off, at which point your family will no longer need to make monthly mortgage payments. Your kids will eventually finish their education, eliminating the need to pay their tuition. Also, once your spouse retires, he or she will probably spend less money on fuel each month.
Here's a summary of the process you'll need to go through to estimate the total cost of your family's expenses.
First, figure out how much money your family spends on each item per year. Then, determine the number of years each expense will need to be paid. Multiply the two numbers to arrive at a final figure. (For example, spending $500 annually on fuel for 25 years would ultimately cost $12,500.) Discount the final figure by the anticipated annual inflation rate over the payment period (4 percent is a conservative estimate).
Use this process to determine how much coverage you need to buy to fully cover each expense. If your spouse works, don't forget to take his or her monthly income into account.
Estimate The Cost Of Your Funeral Arrangements
The cost of laying a loved one to rest can be substantial. In addition to the price of a casket and cemetery plot, there are expenses related to the embalming process, burial, and the placement of the tombstone. Taking all expenses into account, the total cost can climb above $10,000.
Keep that figure in mind when shopping for a life insurance policy.
Estimate The Amount Of Unpaid Medical Expenses
If you're hospitalized or receive medical treatment before you die, expect the cost associated with that care to be steep. Rather than leaving your family to pay the bill, estimate the amount and add it to the death benefit that will ultimately be paid to your beneficiaries. That way, you can avoid burdening your spouse or family with the cost of your medical care.
Determine Your Family's Future Goals
Your family is likely to have needs that extend beyond your current monthly expenses. Some of those needs may not surface for years. For example, suppose you and your spouse have children who are in elementary school. College is still several years away. But that doesn't mean you should ignore the high cost of tuition - four years of college can cost over $100,000 - when deciding how much life insurance to buy.
Sit down with your spouse and identify all of your family's long-term goals. When will your kids attend college? When does your spouse hope to retire? Will your spouse want to care for his or her aging parents down the road? Factor the expenses associated with those goals into the death benefit you choose on your life insurance policy.
Add Up Your Savings And Investments
The process we've discussed thus far is critical for determining how much your family will spend after you're gone to meet its various needs. You must also consider how much money you and your spouse already have set aside.
For example, you probably have a savings account. You might also have a brokerage account that contains shares of stocks or mutual funds. Think about your IRA, 401(K), or other retirement accounts. Some people even have cash hidden in their safe deposit boxes.
The money in these accounts can be used to pay your family's monthly expenses or to meet their future goals. As such, it should be deducted from the total amount of life insurance coverage you would otherwise purchase.
No one relishes talking about their family's need for life insurance. Doing so suggests that one might die before his or her time. But it's important to make sure your family has enough money to make ends meet - now and in the future - in the event the unthinkable happens.
Disclaimer - The above description/explanation is intended as a guideline only, and is not to be interpreted as a recommendation to buy or sell any insurance products, or to provide legal or financial advice of any kind. Also, Kanetix Ltd. does not warrant or assume any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed.
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