Do you need help determining how much life insurance coverage you need? Know the ballpark by using these methods.
Overview
Knowing how much life insurance you will need will take the uncertainty out of the equation. You will have peace of mind knowing your loved ones will have sufficient money for their needs. There are reliable methods to compute your life insurance amount.
Get the Right Life Insurance Coverage
In life, the only thing certain is uncertainty. It is never guaranteed. Here today, gone tomorrow. This is why getting a life insurance is a must. The amount you choose for life insurance coverage will depend on several factors. For those with young dependents, getting a higher coverage is a no-brainer. Aside from the age of dependents, your age and spouse's age matter too. The income you bring in, debts and expenses – all these need to be considered.
The amount of life insurance coverage should help provide for your family when you are no longer around. It should be enough to allow them time to live comfortably while recovering and grieving the loss. The insurance coverage should also give your loved ones enough time to find a replacement income. For instance, your wife will have enough time to get a job that could pay for your children's needs.
These are the factors that figure in determining how much life insurance coverage you will need. Based on these factors, there are three approaches to coming up with a sufficient life insurance coverage.
The first rule of thumb and probably the easiest is - to multiply the annual income you make between seven and, at most, 10. If you're making $50,000 per year, then the life insurance policy should be between $350,000 and $500,000. This is a good starting point for coming up with an appropriate number. However, this computation might not apply to people with five or more young children. Or, this may not be enough for someone with several mortgages to pay for every month.
The second method is the valuation of your assets. If your house and car are paid off and you have pension money coming in or have sizable savings in the bank, the life insurance amount may not need to be high. This method is computed by determining the annual income your family needs for a specific number of years. For instance, your family may need $50,000 per year to live comfortably. However, in five years, your family will get part of your pension, retirement plans, Social Security, interest income from CDs, investment income or your wife will secure a good-paying job. To compute the insurance amount in this instance, you may need to deduct how much money will start rolling in so your family can generate $50,000 per year total income in five years' time. If the income from various sources will add up to $50,000 or more, then you might not need to get a bigger coverage.
The third method of computing life insurance policy is to determine how much money can be invested so it will yield a certain amount per year. If you get a $500,000 life insurance, investing this amount in bank CDs or bonds and securities may yield your beneficiaries a 4 percent interest amounting to $20,000 every year for life. Depending on the cost of living, your spouse may not need to work full-time since she will receive an assured amount of $20,000 per year forever plus possibly money from other sources of income like a pension or Social Security.
The amount of life insurance coverage will depend on your circumstances in life. If you have three or more young dependents, then losing you will definitely create a huge dent in the family's income especially if the spouse does not work. You may need to consider Method Three to ensure that a fixed amount of income comes in for your family every year. Or, you can use Method One but make sure that the coverage amount is enough for your spouse to provide for your young kids' needs until they're old enough to be left in the house without supervision.
The second option usually works for an older couple with grown-up kids. In a few years, your kids will have a life of their own. Or, the wife will start getting her Social Security benefits or your money from retirement plans. With fixed income coming in and no dependent to look after, your spouse can live comfortably on a lesser life insurance coverage. Life insurance helps in replacing income before reaching the age of 65. Once you will get to that age, you will enjoy a number of benefits such as free health coverage, Social Security money, and pension to be able to afford paying expenses out-of-pocket. Also, around that age, your kids are out of college and are earning money on their own. The risks and responsibilities on your shoulder are lesser compared to when you are just starting out.
However, inflation and cost of living changes might factor in. The $50,000 you earn today may not provide a comfortable life to your loved ones 10 or 20 years down the line. These two factors need to be considered too. It would be a good idea to get the maximum life insurance coverage you can afford, possibly $1 million or higher. This way, you can be sure that your family can put up with any eventuality.
You can choose three options in determining the right life insurance amount: First, Multiply your yearly income by seven up to 10. Second, deduct any fixed income your family will get such as pension, Social Security, interest income, investment income or your spouse's income earned from work. Third, get sizable life insurance coverage so the family can live off on fixed annual income from investments.
