Deciding how much life insurance you really need can be confusing no matter what age you are. Simple calculators can complicate the decision by telling you that you only need eight times your annual income. Other online tools will tell you that everyone should take out a policy totaling at least a million dollars. The truth of the matter is this – life insurance is a very personal decision, and the decision shouldn’t be made lightly. Here are considerations to take when deciding just how much life insurance you really need
Funeral and burial expenses can vary by state, location, funeral home and cemetery. On average, final expenses today cost $15,000. If you live a full life, you can expect this cost to be much higher by the time of your passing. The proceeds from your insurance policy are tax-free and will often be delivered more quickly than if your loved ones had to wait for money from your estate.
Total the balance of your mortgage, vehicle loans, student loans and other debt that you are currently carrying. For instance, if the balance of your mortgage is $70,000, you owe $25,000 in auto loans, $50,000 in student loans and have a personal loan
with a $10,000 balance; your total would be $155,000.
If you have children, you’ll want to ensure that they are able to attend college. College tuition rises at a rate of about five percent per year. Take a look at the current costs of any colleges that you are interested in sending your children to. Decide if you want to foot the bill for four years of college or are only going to foot the bill for a portion of the costs and come up with a total. If the state university is currently charging $15,000 per year for tuition and room and board, you would need $60,000 to send one child off to college this year.
Replacing Your Income
Because you have already covered the cost of your final expenses, debts and the kids’ education, you only need to include about 50 percent of the income that you would earn until retirement. For example, if you earn $40,000 a year, divide that number by 0.05, and it totals out to $800,000.
Using these examples, you would need coverage in the amount of $1,300,000. Use this number as a starting point only. Depending on your family’s situation, you may need more or less coverage. If you have no pension through your employer, you may want to take more coverage. If you have a $40,000 life insurance policy
through your company, you may want to consider less coverage. You can also take less coverage if your spouse makes a substantial salary or if you have a significant savings account.
Life insurance is a very personal consideration, and it is a consideration that should not be taken lightly. Our thoughts rarely turn to death when we are young and healthy. Accidents and sudden, unexpected illnesses do occur, and the eventuality of your death must be discussed. It’s important that your family not suffer needlessly after your passing. Purchase a life insurance policy with the proper amount of coverage to ensure that your family is taken care of after you are gone.