There comes a point in everyone’s life when they begin to worry about life insurance. Today this worry seems to come sooner and sooner. Younger people are beginning to see the benefits of having life insurance, especially when they have married and begun a family. Life insurance is an insurance policy that not only covers your death expenses, but also helps your family continue on in the lifestyle you have helped provide for them. So how much insurance should one have? That seems to be the question many people are asking. There are a few different ways to figure this out.
The most important thing to remember when purchasing life insurance is that you are not purchasing if for yourself. Rather, you are purchasing it for your surviving loved ones so that they can continue to cover the financial obligations you have contributed to. So the key to finding out how much life insurance you need is to figure out how much money would it take for your family to continue to meet their obligations and live their lives as if you were still there contributing towards them.
Your loved ones will need the obvious funds for your final days. These include expenses such as medical bills, funeral expenses, settlement of debts, and even new health benefits if your employer had provided them previously. Remember also, that some of these expenses are on going and could continue to change in the future. If you are a primary care giver for dependents, you will also need to provide financial support for childcare services that may arise following your death. However, if you are a single person with no dependents, then setting aside a small savings for funeral and estate expenses should suffice.
The nice thing about life insurance is that the size of coverage you need can be reduced by the amount of savings and liquid assets you own. Liquid being the operative word here. You don’t want your family to have to start selling their cars and home to continue living, this would drastically change their lifestyle. However, if you already have stocks, bonds, money market accounts, and retirement accounts set up, these would be readily available to your family members upon your death. Also, if your spouse is an income earner or can go back into the workforce after your death, this will also help reduce the amount of coverage you would need to meet their daily needs.
To determine the correct amount of life insurance, there are a few different steps you can take. The first is to determine your human life value. Now, not everyone can afford the amount of coverage this would entail, but it would be the most ideal way to make sure your family’s needs are covered after you are gone. The human live value method is based off the contributions you would have continued to make in your family’s financial needs if you were still around. A very simple way to determine your human life value would be to calculate the present value of all the income you will earn for the remainder of your life. By purchasing this amount, you would ensure that your family would be in the same financial circumstance as if you were still alive and earning income.
A less costly way to determine how much life insurance you would need is to determine what your family’s specific needs are and make sure those are covered. These specific needs usually include making sure the mortgage is paid off, the cars loans are satisfied, and that college is provided for the children. With these main specific needs covered, most families can continue with the same lifestyle because the large debts are taken care of, thus leaving them with plenty of finances for day-to-day life.
The final way to calculate the amount of life insurance needed can be completed in a few steps. The first would be to add up all your short-term needs. These are generally placed in three categories: final expenses, outstanding debts, and emergency expenses. Final expenses are medical, hospital, funeral, and attorney expenses. Outstanding debts include credit card balances, auto loans, college loans, and other outstanding bills. Emergency expenses should include a cash reserve for medical emergencies during your final days.
After you have added that up, add up your long-term debts. These should include your mortgage and college tuition for the kids. After that is completed, calculate your family expenses. These include necessities such as childcare, food, clothing, utility bills, entertainment, travel, and transportation. Calculate this figure based on one year’s worth of expenses and figure it based upon how many years you would like to provide this for your family. After you have tallied all your income needs, reviewed all your liquid assets and accessible cash, it’s time to figure how much this will amount to. Simply add the short-term debt with the long-term debt, and the family expenses. Now subtract your liquid assets and accessible cash and you will have a firm figure on what your insurance coverage should be. Remember, as a rule of thumb, it is always better to be over insured than under insured.