How Much Life Insurance Coverage Do You Need?
How much life insurance coverage do you need?
There isn’t exactly a “right” answer for this question. While some people prefer to get ballpark numbers and use rules of thumb, others may want more more detailed planning that encompasses all financial aspects for their family. In either of these cases and everything in between, we should be asking the following questions:
How much will my family need to fulfill leftover obligations?
Protection is the number one priority when talking about life insurance. This means adding together all debts and obligations, including mortgage loans, car loans, credit cards, medical bills, student loans, etc. and making sure you have the correct coverage to pay these debts off. These numbers will fluctuate as debts get paid off and new ones arise, but we recommend staying on the safe side and estimating a bit higher rather than lower. Doing this not only ensures that debts get paid off, but also locks in your insurability so that you get the best rate offered.
How much future income will my family need?
To answer this question we need to calculate how much income your family will need to sustain their lifestyle, when you are no longer providing an income. There are many methods that can be used to calculate this amount. One method is to simply multiply your annual adjusted income by the number of years needed to replace the lost income. For example, let’s look at a 45 year old who is currently making $70,000 per year before taxes, and plans to retire at age 65. That’s 20 years of an expected income of about $59,500 assuming a 15% tax bracket. The future income this family will need to replace is $59,500 x 20 years, or about $1,200,000. This is a rough estimate which does not take into account inflation, assets, and other factors that may affect the amount needed. We have two other articles (part 1, part 2) that go more in depth on income replacement calculations.
What other expenses will arise?
Create a list of any major future expenses your family will likely acquire. This can include funeral expenses, children that will be going to college, and even calculating a little bit to compensate for medical payments for when your spouse gets older. Funerals cost anywhere from $7,000 – $10,000 on average and include the ceremony and casket expenses. Colleges can average about $33,000 per year. Multiply that by 4 years and you can expect about $100,000 per child for college tuition.
A lot of things can go in to consideration when trying to find the right amount of coverage for you and your family. It’s important to note that no method is “one size fits all” and each case should be looked at individually and planned out accordingly. These three questions should help serve as a starting point to narrow down the amount of coverage you need. Add up the sums of each question and speak to an advisor on how they can create a plan that is tailored for you.
Some other things to keep in mind when calculating how much coverage you need include: work provided life insurance, inflation, taxes, investments and assets, and any inheritance you wish to leave behind.