How Much Life Insurance Do You Need?

Many people do not like talking about life insurance — in times of health and relative ease, it can be an uncomfortable conversation. Moreover, the complexity of determining exactly who needs it and how much they need can be overwhelming. The number of people uninsured or under-insured continues to increase as more and more people forgo it altogether, unsure of where to find reliable information regarding life insurance. 

To help answer the first question, anyone who has financial dependents and does not have enough savings to provide for future needs and pay off current debts should have life insurance.  For most people, simple term life policies that cover their working years, often 30 years, are the most cost effective way to provide financial security for your dependents.  

In the past, the formula for "how much" was seven to 10 times your total annual income, but that left many under-insured. It is good to keep in mind that there is no one-size-fits-all when it comes to life insurance. Take the time to discuss your family needs with your spouse and potentially a financial planner in order to truly analyze your specific situation.

Now that you understand why you need life insurance, below is a four-step guide to help estimate the amount of life insurance you need.

Step 1: Evaluate Your Family Needs

First determine how much money it actually takes to run your household- this is your annual budget.  Whatever portion your income contributes to this total will need to be replaced.  You will also need to calculate your unpaid mortgage and any outstanding debt as this should be taken care of at your death.  Add all your funeral expenses and any possible estate taxes as well. 

Step 2: Consider Future Financial Obligations

In your calculations, estimate the total amount of future financial obligations. This includes the cost of sending your children to college. Do not make a mistake of underestimating your family’s future needs. By doing so, you will be underestimating the amount of insurance you need, putting your family at risk of a financial shortfall. Make an outline of your family’s cash flow needs including long-term financial goals. Add all these factors up and you will have an estimate of the amount of money your survivors will need in the future. Don't forget to factor in the loss of your annual income and current financial quality of life. Remember, the higher your income, the higher your responsibilities and expenditures. This means that you will need more insurance to cover the income loss.  This is where a financial planner can help provide a more accurate estimate of needs- both current and future.  

Step 3: Add up All Your Resources

Resources should be a sum of all the assets you currently have. Add up your spouse’s income, savings (whether long- or short-term), and any balances in your 401(k)s and IRAs. Remember to add college funds you have set up for your children and emergency reserves.  If your employer provides any group life insurance policy for you, include that as well.

Step 4: The Calculation

Now that you have a rough estimate of your family's needs and assets, you can proceed to calculate your life insurance needs. The difference between your family’s resources and needs should give you an estimate of the life insurance you need.

After you have obtained appropriate insurance coverage, you should keep reviewing it on a regular basis so that if your circumstances change, it will still offer sufficient protection for your family.

_{This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.}