Determining Your Life Insurance Needs

In order to know exactly how much life insurance you will need, you must first determine what your loved ones will need in order to maintain their current standard of living in the event of your death. Here are some things to consider before deciding on a dollar amount for your policy.

Meeting Your Obligations

Start by figuring out what the death benefit would need to cover if your earnings stopped. What would it cost to meet your obligations to loved ones? Consider the immediate financial impact of your death as well as the ongoing and long-term expenses to be met without your income stream.

The immediate expenses would include your own funeral costs, as well as mortgage payments, utilities, childcare, and more. Your long-term responsibilities might include your children’s college education and your spouse’s living expenses.

Calculate these costs as best as you can and boost the amount just to be on the safe side. After all, there may be much that you haven’t thought about or have underestimated. With this figure on paper, you can start subtracting your savings and investments, your spouse’s retirement funds, and other insurance policies that might help buffer the impact. The tally can be further reduced if your spouse works.

Your final figure, your expected expenses minus your current and future liquid assets, will help put your life insurance needs in proper perspective.

Multiple Policies

Perhaps there are two distinct periods in your life in which you foresee an added need for income protection. For instance, if you’re now the primary earning parent of a young family, you would need to get them raised and through college and into young adulthood. Then, once that period has passed, your surviving spouse might require income to meet living expenses and retirement needs.