How Much Life Insurance Should You Buy?

Most families can benefit from a life insurance policy but knowing how life insurance to buy can be challenging.

Rather than picking a number out of a hat, consider using a needs-based approach. A needs-based calculation looks at real-world expenses and how long you will have those expenses.

For example, a family with grown kids has different coverage needs when compared to a family with newborn twins. The first family probably gets a bit more sleep as well.

To calculate your life insurance coverage needs, you just have to ask yourself a few questions.

 1.     How much life insurance do you have? Your existing life insurance coverage reduces the amount of new life insurance you need to buy.

 2.     How much do you have in savings and investments? The amount to have in savings and investments also reduces the amount of life insurance you need to purchase.

 3.     What are your annual after-tax earnings? For most households, life insurance in income replacement.

 4.     What percentage of your income do you need to replace? You may not need to replace all your income, particularly if you budget for debt in your life insurance calculation.

 5.     How many years of income do you need to replace? Some families may only need to replace income for a short duration. Other households, particularly those with young children, may need to provide replacement income for a longer period.

 6.     Do you need to fund an emergency fund? By putting money aside for emergency fund oh, you can ensure that your family is well prepared for emergencies.

 7.     How much do you expect to pay for final expenses? Consider putting $15,000 aside for funeral and burial expenses.

8.     How much is your household debt, including the mortgage? If you put aside some money in your life insurance policy for debt, your family will have lower monthly expenses.

9.     Do you need to put money aside for college for education costs? If you already have some money saved, deduct that amount from the total needed for education costs.

Now comes the math.

·       Multiply your after-tax earnings by the percentage of income you need to replace.

o   Example: $50,000 x 50% = $25,000

·       Now, multiply that number by the number of years you need to provide replacement income.

o   Example, $25,000 x 20 = $500,000

·       Then add 6 through 9 from above.

o   Example: $5,000 + $15,000 + $100,000 + $40,000 = $160,000
o    So far you need $500,000 in replacement income + $160,000 for other expenses (including debt).

Total (so far): $660,000

·       Lastly, subtract the totals from questions 1 and 2. Remember, these reduce the amount of coverage you need to purchase.
o   Example: $660,000 – $50,000 (other life insurance) – $50,000 (investments and savings) = $560,000

By using a needs-based methods to calculate the best coverage amount, you take the guesswork out of the process because you are using real-world numbers.

 Discuss your coverage needs with your agent or broker

In addition to choosing the right coverage amount, you also if you need to choose the right policy type for your needs. Your agent or broker can walk you through your options so you can choose the best coverage strategy to protect your family.