Pushing a pencil to add up just how much life insurance you need isn’t easy. At first glimpse, the math can seem invasive and complicated. The subject—death—is quite touchy. Add to the discomfort a good measure of guilt and confusion. Still, everyone needs to confront the issue of life insurance. It’s an important financial tool that will assist your family in the event of your untimely demise.
When trying to determine the coverage you need, experts advise that you stay away from shortcuts or easy solutions such as buying “multiples” of your income. These may seem like quick fixes, but New York State Insurance Department Commissioner Kermit Brooks says jiffy, one-size-fits-all formulas often overlook your specific needs. “Consumers hear some advisers recommending that they purchase five to seven times their yearly income. In some cases agents will tell you to take out a policy that covers 20 times your salary,” he says. “The truth is that there is no hard and fast calculation.” Brooks says the right steps include assessing your current and future obligations against your assets and overall financial strength.
Examine the reasons you need life insurance. They should be simple and clear: A policy is meant to provide your dependents a certain amount of income over a set period of time should you die. “Younger folk in particular need to view life insurance as income replacement,” says Dwight Raiford, a senior financial adviser for MetLife. “If you died today, it’s there to make up for all the income you’d earn during a normal life expectancy.” Your policy’s payout, after all, is meant to go toward the bills, the mortgage, and even tuition for your children.
Tally up your current debts and obligations and balance them against current assets. Your mortgage, car note, credit card balances, and loans will have to be paid off in the event of your death. It may be a wise idea to include a cushion to cover for interest payments overtime.
Calculation should center on the salary or income you’ll need a policy to replace. Be sure to include a little extra to cover for inflation since the steady rise of prices over time may decrease the buying power of the lump sum your dependents receive. Additionally, you may want to focus your number crunching on the number of years it will take your youngest child to reach 18 years of age. Future obligations — and undergraduate college tuition for your kids in particular — should also play a part in the math as you do to settle upon the right amount of coverage.
Figure out funeral and estate expenses. (This is possibly the most sensitive issue.) Your policy should include provisions to cover the cost of your burial or cremation.
Determine an estimate. Once you have figured out how much insurance you’ll have to carry as a safety net for loved ones, you can start making adjustments to your number. Factor in all assets that you have including the current value of retirement accounts and Social Security benefits.
Given the complexity of the calculations and projections Brooks suggests you sit down with a financial planner or adviser in order to cover all contingencies. There’s a good reason: It’s best to overestimate rather than undershoot your needs. Why? Once you’ve signed on for a policy, you can always adjust the amount of coverage you need downward. But, upward revisions will typically require a new application and new coverage.
WEALTH FOR LIFE PRINCIPLES
1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy