Not sure how to determine your coverage amount? You’re not alone. By adding up your basic expenses, you can get a pretty good sense of how much life insurance you need to protect your family.
Itâ€™s not difficult to understand why life insurance is a great way to protect your familyâ€™s financial future in case something happens to you â€“ after all, when your life ends, so does your earning potential. The difficult part is figuring out how much life insurance you need to make sure your family can carry on without you.
There are several ways to go about doing this. One method is to multiply your annual income by 10 and use that sum as your death benefit. Alternatively, you could hire a financial advisor to create a comprehensive financial profile with the aid of worksheets and other tools of the trade. A less expensive option is to ask yourself a series of questions about your monthly and one-time expenses and perform calculations accordingly.
Calculate approximately how much you spend every month on the following:
- Automobile Insurance/Gas
- Phone/Mobile Phone/Tablet
- Childrenâ€™s Education
- Loan Payments
- Home Maintenance or Condo/Co-op Fees
- Homeowners Insurance
- Other Insurance
- Child Care
Add each of these expenses up so you have a total monthly sum, and then multiply that amount by 12. Give or take a couple thousand, thatâ€™s how much you spend in a year.
Estimate how much money is required to cover each of the following one-time expenses:
- Estate Taxes
- Charitable Bequests
Add each of these expenses up so you have a total one-time sum.
Combine your total one-time expenses with the annual sum that you calculated in step one. Thatâ€™s approximately how much life insurance your policy would need to provide for your family each year if something happened to you.
If your coverage amount seems overwhelming, remember that your familyâ€™s financial needs will change over time. Obviously, your expenses will be highest while youâ€™re raising and educating your children. But once theyâ€™re out of the house, chances are your expenses â€“ and the amount of life insurance you need â€“Â will decrease significantly. Thatâ€™s what makes term life insurance an affordable and attractive solution. The key to term life insurance is that itâ€™s effective for the period of time you need it, so youâ€™re not stuck paying the premium forever. And if youâ€™re healthy and in your thirties or forties, you could get a term life policy worth hundreds of thousands of dollars for less than what you pay for your daily Starbucks fix.
For a more accurate assessment of your life insurance needs, reach out to a financial advisor or life insurance professional.