Life Insurance
How much do you need?
Life insurance policies can be very complex. Most insurance agents will help you
figure out how much life insurance coverage you need. However, you can figure it
out on your own by following these four steps.
Calculate your current living expenses.
List your mortgage or rent payment, your annual budget for food, clothing
and utilities, plus consumer loan payments. Then add the cost of services
you currently provide for yourself, such as house cleaning and child care.
Figure out how much income your family can count on.
Include your spouse's salary, Social Security and pension benefits that your
family may receive after your death. Also factor in interest and dividends
from your investments, as well as income your survivors could earn by
investing the proceeds of any insurance policies you already own. Set a
modest rate of return to give your family more flexibility to meet
unexpected expenses.
Estimate your family's shortfall or surplus.
Factor in any non-recurring expenses, such as your funeral bill and future
tuition costs for your kids.
Calculate the amount of insurance you need.
As a rule of thumb, you should buy $100,000 of life insurance for each
$5,000 of additional income your spouse will need after your death. For
example, if your family faces a $25,000 shortfall in income, get $500,000 of
coverage.
Types of life insurance policies
If you buy a level-premium term policy, your entire premium buys insurance
coverage. With whole-life policies, you also pay the policy's investment account. As a
result, the annual premium can get you two to five times as much term coverage
as whole life.
With level-premium term policies, you can lock in your annual insurance payments for five to 20 years. To obtain the best price, contact a research firm that tracks life premiums.