Like it or not, death is inevitable, with life insurance there is a protection against the loss of income that would result in case the person who is insured passed away. In this article I am not going to advice you about a mathematical formula to derive at your need. I’d only let you think about your need so that you can come up with the figure yourself. I’ll just outline the requirements for your calculation.
In basic financial planning, life insurance is of great importance. Figuring out exactly how much life insurance you need can be a daunting task, but it is one task that you need to tackle especially if you have dependents looking up to you. One of the basics your should look at while deciding upon your life insurance is to consider the standard of living that you want your beneficiaries to maintain in addition to your financial situation.
Questions you should ask yourself before getting the insurance:
- Do you really need the life insurance?
- What kind of insurance should you get?
- How much insurance do you need?
- What standard of living do you want your dependents to have after you leave?
Who may not need life insurance?
- One that holds no dependents and has more than enough possessions that can cover most of the expenses; a person that can afford to cover all debts and fees.
- One whose dependents can support while living and even after death.
- One that has assets, investments, trusts, and bonds.
Who may need Life Insurance?
- A person with dependents, more so if you are the primary provider.
- A person with significant debts that is significantly higher than the recorded assets. This person may need to obtain insurance in order to ensure that their dependents will have something even after death.
- A person who is uncertain of his future financial state. Insurance must be acquired as early as possible so when need comes, there is something to hold on to.
How Much Life Insurance do you need
Determining the measure of life insurance that you will need may involve a mix of the above scenarios. Once you have the answers to the questions asked, then you are one step closer to determining your life insurance needs.
- Make sure you have your figures right for your monthly expenditure as this goes a long way in determining your insurance needs. Note down how much you spend on a monthly basis and the amount of debt that you have. Your insurance must include the required amount to cover your debts in addition to the interest it may incur.
- You need to factor in any future obligations you may have for example, paying your child’s college tuition, in this case you will need to make an allowance for the tuition
A figurative example of the insurance you need
Leaving out your home, seeing as it is hard to obtain income out of the value of real estate, estimate how much your dependents will need in order to maintain their standard of living in case you die. Once you have the figure, multiply that number by 25 and you will get the money that you need to leave your dependents; now add your savings, investment accounts as well as retirement plans.
Let’s say your dependents require $200,000 of annual income, then the required annual income after multiplying by 25 is $5M, if you subtract the $2M that you have in savings, then you will need $3M life insurance in order to ensure that your dependents are covered.
Remember: In case your beneficiaries have the ability to earn, then your insurance needs reduce. You also need to consider whether or not you want to provide the income for the rest of the beneficiary’s life or just for s long as needed after you die.
Should you have Life insurance for your domestic partner?
This is another important question that can change your life insurance need. Do you want to insure your spouse or domestic partner who is unemployed? I have insurance policy for my wife, SMB, which is equal to 4 years of my gross annual salary. And for that I have a deduction of $6 from my each bi-weekly pay check.
I have no clear-cut answer if you need life insurance for someone who’s not earning and thus the demise would not create a financial problem. I’d leave it to you. Here’s one interesting video which talks about ways you can have life insurance conversation with your spouse.