It can be difficult to figure out just how much life insurance is needed. There’s always the push from insurance agents to purchase a large policy. Although it is important to protect your family, you must be mindful of choosing a plan that will remain affordable. Many families know that they need life insurance in the event of an untimely death. However, these same families are unaware of the factors that play into purchasing the right amount of coverage.
Here are some methods you can use to determine how much life insurance you may need.
For individuals who are looking for insurance to replace their earnings, use the following:
Multiply the yearly income by a determined time number. (If you’re wanting to replace income for 5 years then use 5; 10 years:9 and 20 years:15).
You can also use a method based on your needs and not your future worth. It’s a bit more accurate and allows you to put aside enough but not too much. There are several steps involved with this method, but it’s an easy equation.
1. You must first calculate the total amount of your financial resources. This would include paid up investments, any existing life insurance arrangements, income, savings (less 3 months of spending), and social security benefits (if applicable). You then have to calculate the amount your spend per year. Include all your living expenses including transportation fees and expenses for children.
2. Determine how long your family can manage without your income. This is determined by dividing your total resources divided by your estimated spending. This will be the number of years your family can go without your income.
3. Calculate how many years there are remaining to support your loved ones. Boys are averaged at 25 years of age for support and girls are averaged at 22 years of age. Using these averages, for each child, calculate how many years before they come of this age. The result of this will be noted as figure “A”. You should then figure the average life expectancy of the parent. Subtract figure “A” from the year’s of the parent’s life expectancy. The result will be used in the next step.
4. Take the result from step 3 and multiply it by the yearly expenses. That’s how much life insurance is needed.
Use this formula to help you get just enough life insurance. Once you have the number, you can chose to get more or less insurance depending on what you can afford. There are a number of options that you can chose from. If you are having trouble deciding which plans will work best for your situation, talk with a financial advisor before your insurance broker. They will give you great advice and help you make a great decision for your family.