Recognizing the need for life insurance is easy. Determining exactly how much you need is trickier. While most people have a romantic idea about how much they’d like to leave their families, they don’t generally recognize the cost involved. To gain maximum benefit, you’ll need to assess your life situation, what bills would need to be paid if you were to die, and what needs your family might have. Only then can you even begin to choose an appropriate coverage amount for your life insurance policy.
Conducting a Capital Needs Analysis
In order to realistically determine the amount of life insurance you should purchase you will have to conduct a capital needs analysis. This is something you can attempt to do on your own, but you should also involve your insurance professional or a financial planner before making your final decision to make sure nothing has been missed.
To start, you’ll need to clearly outline your financial obligations. You’ll need to list all of your current obligations as well as the obligations you’ll have in the future. Your current obligations, for example, may include your mortgage and car payments, revolving debt, household budget, and other daily living expenses. Your future obligations may involve college tuition for your growing children.
Once you have a clear picture of your obligations you’ll need to make an honest appraisal of your current assets. This should not include your own income but your spouse’s income, any money you have in savings, any existing life insurance coverage, and investment accounts your spouse would be able to draw from immediately.
Once you have a total estimate of your available resources, subtract it from your total obligations. The number remaining is good starting place for determining how much life insurance you’ll need.
Adjusting for Variable Factors
There are going to be times in your life where you may want to take a step back and reassess your life insurance needs. The main purpose of life insurance is to ensure your family can live comfortably in your absence. If your mortgage is paid off, you may choose to stop paying for term coverage. If your children are out of college, you may be able to drop your policy limit (and your premium), to reflect a lower need for your spouse alone as opposed to your entire family.
The rule of thumb is to ensure your family is provided for a term of approximately 20 years. There are a lot of factors used to calculate how much money that would take. There are several life insurance calculators used by insurance professionals today, and your agent will assist you in using the ones best able to help you determine the actual amount of life insurance you need. Don’t waste your time with simple shortcuts or random numbers. Doing so may only end up shortchanging your family in the long run.