How Much Life Insurance Do You Need?
Good financial planning requires a periodic review of your life insurance. At least once every five years, you should meet with your professional insurance advisor to review your life insurance needs and your coverage. You should also contact your insurance advisor when there are changes in your family situation (deaths, births, divorces) or in your major financial obligations.
How much life insurance should you have? There are numerous methods used to make this decision, and they range from a simple multiple of five or six times your annual income to a more complicated (and more accurate) projection of future needs for your family. Here is one method for estimating how much life insurance you need.
First, make a list of debts you might want to eliminate with your insurance proceeds, such as credit card balances, car loans, and your home mortgage. Add estimated amounts to cover college education for your children or any other special needs.
Second, estimate the future annual living expenses your family would incur on its own. Subtract these amounts: your spouse's net annual take-home pay, income from investments, and social security survivors' benefits. The difference between the projected expenses and the projected income is the amount you need to cover with insurance each year. Multiply this amount by the number of years that your family will need the income.
Finally, add the total of debts and one-time expenses calculated in the first step to the projected annual needs from the second step. The result is an estimate of the amount of life insurance you need.
If you need help with the calculations, let us assist you and your insurance advisor in planning for the security of your family.
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