How Much Life Insurance Do You Actually Need?
There are many tips and formulas for determining how much term life insurance you need, but most either over-estimate or under-estimate the reality of, well, life. For example, the needs of someone with a forever dependent child will require much more coverage than someone with none at all. Formulas that merely multiply your current income and leave it at that offer one-size-fits-all solutions when tailor-made tactics are needed. The good news is that you can easily and accurately calculate the amount of coverage you need. This information can be used to come up with accurate figures so that you can locate the most competitive life insurance quotes available.
The following is a simple four step process will give you a clear understanding of what it will take to care for your final expenses and your family should tragedy strike.
Step 1: Calculate Your Final Expenses
For those of you planning for a regular funeral and burial, costs generally run from $10,000-$20,000, so settle in the middle for $15,000. Average costs for a cremation with a ceremony and scattering of ashes, you’re looking at anywhere from between $2,500 and $9,000.
Step 2: Calculate Your Total Debt, Including Your Mortgage
Debts such as mortgages, car payments, existing student loans or other accumulated debt will be inherited with your estate. Therefore, it makes sense to tally all of these up and incorporate them into the lump sum provided for in a term life insurance pay-off. These debts can be overwhelming for loved ones, and should be provided for in event of a tragedy.
Step 3: Calculate Educational Expenses
This can be hard, especially when children are several years away from college. However, you can safely average a 5% annual increase in college costs and use this as a starting point for calculations. Take some time to research today’s costs for priority colleges and use this to calculate what to cover. If you have no children, you can skip this step unless your spouse desires to continue their education.
Step 4: Figure Out What it Costs to Replace Your Income
Once you’ve taken all of these costs and expenses into account, there is a simple formula to how much more you’ll need. Simply take your current income and multiply it by 50 percent. Then, take this number and divide it by .05. For example, if you currently earn $75,000, you would need $750,000.
Add all four totals together and then modify to accommodate special circumstances, such as long-term dependent children, etc. What’s left is an adequate level of coverage you need to get your life insurance quotes for. Should your situation change in the future, you can always increase or decrease coverage accordingly!
