It is a fact of life that every beginning must come to an end, yet the subject our final journey doesn’t have to be a foreboding one. The process of selecting and purchasing life insurance is not unlike making travel arrangements. Preparing for what is to come can be a celebration of life and an opportunity to remember what is truly essential: those who remain behind. And what better way to ensure the well-being of our loved ones than by providing them a departing gift that can afford them a measure of protection in the face of financial uncertainty?
If you have already chosen to invest in life insurance for you or your family and have decided on a policy that meets your needs, the next logical step is to determine how much coverage you need to purchase. Whether you opt for term life insurance or a policy with a cash value component, your coverage amount should always reflect your current financial situation. Before deciding on a death benefit amount, keep track of your income and expenses. Knowing exactly how much you make on a yearly basis, which portion of that you spend, and what you spend it on can help you approximate what your loved ones will need to make up for when you are no longer able to provide for them.
Calculate Income and Expenses
After assessing your monthly income, take into account the funeral and burial costs, mortgage payments, car, and medical insurance payments, as well as any other financial responsibility you are currently assuming. You may have heard that the general rule is that you ought to purchase life insurance worth ten times your income, yet that formula is somewhat simplistic when you consider all the factors that should come into play when determining your family’s future livelihood. If needed, try to procure a coverage amount that equals or exceeds your current salary, while also considering external factors such as inflation and other contingencies. If your salary is your family’s primary source of income, make sure to factor in the following:
- The total cost of benefits you may be receiving through your employer, such as medical insurance, 401k contributions, etc.
- All pending responsibilities, whether they be mortgage payments, credit card debt, or medical bills.
- Education expenses for each child dependent in the household.
- Any services you currently provide for your family that they would have to cover in the event of your passing, such as home maintenance, tax filing, child care, etc.
To calculate the amount of life insurance you need, add up all applicable expenses and subtract your assets and savings. Follow the lead of life insurance companies and base your projections on hard facts and statistical information. Bear in mind that the average funeral and burial expenses in the United States can go well above $10,000, depending on your state and the type of service selected. Also consider that the average cost of college tuition could range from $10,000 to $20,000 a year, making the total amount required to attend a four-year college over $80,000 per child, if the cost of higher education doesn’t skyrocket any higher than it has in the past decade.
Consider Your Options
While you have the opportunity, learn how you can save on funeral costs and iron out potentially costly details such as casket and gravestone selection. If you have the means, consider planning for your children’s future education separately, and go over alternatives such as college savings plans and scholarship opportunities. As a way to reduce potential expenses and further cover your family in the event of an emergency, think about setting up additional income sources such as a secondary life insurance policy for your spouse, or a joint life annuity that guarantees a lifetime benefit for either of you.
If you already have an additional life insurance policy through your employer, are due to receive a pension, or have a secondary source of income, calculate that into your death benefit estimates, in order to avoid spending more in life than what your family would require upon your death. Remember to include your loved ones in the decision-making process, as their feedback can be more valuable than any amount of research you conduct. For those looking for an easier and faster way to calculate expenses, know that some of our partner companies, like John Hancock, offer free online tools that may help you determine your life insurance needs in a matter of seconds.