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Understanding Life Insurance Calculations

life insurance calculatorWith the holiday rush in full swing, finishing your holiday gift buying probably ranks high on your to-do list.  But what’s just as important as crossing that last gift off the list is making sure you budgeted enough to cover the entire list.  One gift you might consider this holiday season is the gift of your family’s financial security in case the unthinkable happens.
Calculating how much life insurance you need may seem a bit more daunting than determining your gift giving budget, but using SelectQuote’s Life Insurance Calculator makes doing so quick and simple.  However, if you want a better understanding of exactly what is taken into consideration when calculating your life insurance need, it comes down to two factors: how much do you need to cover immediate obligations and how much future income will your family need to sustain their livelihood?
Calculating the immediate obligations is relatively easy since they are typically fixed, lump-sum figures.  The first portion will include final expenses, such as funeral costs, any uncovered medical expenses, and final estate-settlement costs.  Then, include the rest of your financial obligations such as your mortgage, any outstanding debts and college funds for your children.  Most all of these figures are already set or require a small amount of research to estimate.
The second factor in determining the coverage you need takes a little more work as you are predicting what amount of capital your family would need if you were no longer able to contribute to the family income.  Looking at your family’s financial needs now will give you a better sense of what amount of insurance you need.  A good place to start is to determine how much total annual income your family currently needs.  You can then ask yourself how many years will they need to rely on this amount of income, taking into account how old your children are and at what point do they start to provide for themselves?
As you start to come to a figure that encompasses the amount of income your family will need for a specific window of time and your immediate obligations, you can start to take into account the factors that can lower this estimate.  If your spouse currently works, you can estimate how much income that he or she can provide over the number of years he or she is planning to work and subtract this from your total life insurance need.   Then compile any current savings, retirement savings, investments and assets that could be liquidated into a single sum and deduct from the total life insurance need.
The final result gives you an idea as to how much replacement income and what amount of immediate obligations your life insurance policy should cover over a period of time to help your family build a financially secure future.  Like any major purchase, you should compare your options when purchasing life insurance. Different policies will have different pros and cons, and will be influenced by different risk factors. By using an independent term life insurance agency, like SelectQuote, you can compare different life insurance companies and policies to find the best policy to fit your budget and lifestyle.

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