How to Calculate Your Life Insurance Needs

Use this handy guide to determine how much coverage is right for you

If anything were to happen to you, what would your family need financially to continue without you? Use the following calculation to figure out the amount of life insurance coverage that’s appropriate for you:

Estimate the number of years before your youngest dependent will no longer need financial support. If you have no dependents but your spouse does not work, you might also want your policy to cover him or her until they are eligible to collect social security at age 65.

Multiply your annual salary (before taxes) by the above number. First subtract costs that occur as a result of working (for example: transportation to and from the job).

Add your funeral expenses.

If you own a business, add the cost to find and hire an employee to replace your position. Consider arranging a Buy – Sell agreement, a legal document backed by insurance, which provides the funding needed for partners or stockholders to take over the business or buy back shares you willed to your beneficiaries.

Add your overall financial obligations including mortgage, debt, estate taxes, and taxes for the year of death. In addition, consider adding the cost of the monthly premiums for your spouse’s life insurance, to protect the children in case both parents die.

Add anticipated income needs for the future, such as college funding for each dependent, extra curricular activities like class trips, piano lessons, karate classes, or anything you would plan to purchase for your children if you were still alive.

If your spouse does not have their own, you will need to add in the cost of the yearly health and dental insurance premiums that were previously subsidized by your employer.

Add the financial value of services, such as lawn/house maintenance, tax preparation, child care, etc. that you provide for the household, which will need to be outsourced upon your death.

Add 3% each year for inflation.

Subtract your spouse’s salary multiplied by the number of years he/she plans to work after your death.

Subtract money in your retirement, savings, and pension accounts, and the benefit your family would receive from other insurance policies.

Subtract the money you expect your beneficiaries will receive from the Social Security Administration on your behalf. Visit http://www.ssa.gov/planners/calculators.htm to calculate an estimate of your Social Security death benefits.

Finally, subtract 6% for potential yields from investments.

Visit www.lifehappens.org/howmuch for more information on how to determine the right amount of coverage for your family.

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