Life Insurance – How Much Do You Need?
Generally speaking, if you wish to cover the expenses of your family members after you pass away, you should purchase life insurance.
On the other hand, if you have no dependents and possess sufficient amount of assets to cover your debts and funeral expenses, you can refrain yourself from buying this contract.
Even if your family members have enough assets to satisfy all their needs after your death, I personally believed that a life insurance policy should be considered.
Make sure that you talk to your financial advisor or a licensed insurance agent to decide which type of life insurance policy is best for your situation.
Below I outlined several key aspects, which makes life insurance an important consideration for an average person:
- By purchasing life insurance you can be confident about the financial stability of your family members after your death. This is extremely important if your loved ones rely on your financial support.
- Life insurance can serve as an inheritance to your dependents.
- Through life insurance, you can be sure that you don’t leave any of your outstanding debts unpaid.
- Be assured that your children will have enough money to cover their education expenses.
As the beneficiaries of your life insurance contract generally are your family members, the amount of it depends on their needs. You have to estimate the future expenses of your family after your death.
When contemplating what amount of life insurance policy to buy, you have to take into consideration wide range of facts.
Some of the most important ones are presented below.
1. Forecast your family’s future needs.
You can make a rough estimate by adding expected inflation to the current monthly costs of your household. You have to consider any amount that will be paid upon your death, such as expenses associated with funeral and potential estate taxes, any unpaid medical bills, mortgage payments and other outstanding debts.
Your policy has to cover at minimum the total of these costs. The amount above this will be used to cover periodical expenses of your family members.Take into account the future financial obligations of your family.I’m talking about expenses such as tuition for kids’ college, vacation, and any abnormal expenses.
2. Consider the income that will be earned by your family members.
These will be income such as your spouse’s salary, interests to be received, the balances in your 401(k)s, IRAs, 529 college savings plan, emergency reserves, etc.
In addition to the above-mentioned considerations, you have to take into account your current situation to choose the right type of life insurance.
Companies offer different packages based on the customers’ status, such as life insurance that is appropriate for a single with no dependents, just got married couples, retirement age people, etc.
You can estimate the appropriate coverage for you by the following formula:
Annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs-savings – existing college funds – current life insurance.
Moreover, there are many websites offering life insurance calculators, which will estimate the right amount for you based on several inputs.