How Much Life Insurance Do I Need?
Sunday, July 9th, 2006
I have heard this question for a long time. Going back to my early days in life insurance sales, it alwayed amazed me how many people had no idea how much life insurance they needed. Then it occured to me that it wasn’t a matter of not knowing what they needed, but more so a matter of not knowing how to plan for the various stages of life.
Just as I use to do in sales on paper, we have implemented a Life Insurance Needs Calculator to assist in you in planning how much life insurance you should purchase. Let’s dig a little deeper into how to use the life insurance needs calculator.
Simply input the values you expect (or desire) that your spouse will have to pay for the following expenses:
- Funeral expenses and estate taxes - burial costs, funeral home fees, probate fees, estate taxes.
- Amount needed to payoff non-mortgage debt - These include car loans, personal loans, credit cards, etc.
- Emergency Fund - This should be 3-6 months income that your spouse will need to cover monthly bills while waiting for social security benefits (if any) are due.
- College Fund - If you have young children, you may want to set aside some funds to pay for their college education.
- Expected annual living expenses - Expenses that your spouse will have to continue paying after your passing.
Next we will look at assets you have that could offset your insurance need.
- Surviving spouses expected annual income after taxes.
- Expected annual social security benefits - see your annual social security benefits statement for more info.
- Spouses Age
- Liquid assets on hand - CD’s, saving accounts, current investments, etc.
- Do you expect your spouse to invest conservatively or aggressively.
The result will be your life insurance need or lack of need. Also, remember some of these needs are what I call permanent needs and some are temporary needs and should be insured as such. For example, college or educational costs, your mortgage, and non-mortgage debt are what I call a temporary need. Meaning these needs last for a set time period, between 5 to 30 years in most cases. Permanent needs include funeral costs, emergency fund, and living expenses are things that do not go away regardless of age.
In most cases we recommend a form of level term insurance for the temporary needs and a whole life policy for the permanent needs. Remember to talk to your financial advisor for details on your personal situation.
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