How much life insurance do I need?
Calculating how much life insurance you need can be a tricky process. In fact if you did an internet search on the topic, it would yield so much information that you’d be scrolling forever. While there are formulas out there that will instruct you to multiply 7 times your income and then add final expenses, I’ve found this simplistic formula to exclude too many other things that can influence the the actual amount you really need to have. Calculating insurance needs is a very individual thing however; there are some basic categories that apply to almost everyone.
- Final Expenses
- College costs
- Mortgage and debts
- Income replacement
Final Expenses
Final Expenses are expenses incurred at the time of a person’s death. These could include funeral costs and expenses that arise out of end of life care.
College Costs
Paying for college can be an expensive endeavor. If you want to include this cost in the amount of insurance you take out, you need to first decide if you want to pay for all or just a portion of college tuition. Whatever that number turns out to be, add it to the face amount of the policy.
Mortgage and other debts
You want to make sure you pay off the balance of the mortgage and any debts you may have accrued that your loved ones can be liable for in the event of your death. These expenses can include credit cards, car notes and medical bills that may pass on to them.
Income Replacement
Calculating this one may take just a little computation. Grab a calculator if you don’t have one already and we’ll make quick work of this. If you’ve calculated enough to pay off the mortgage then you don’t have to include housing. That still leaves day to day expenses and things you may have to factor in like childcare, food, clothing, utilities and etc. The easiest way to do this is to calculate a year’s worth of expenses and then multiply that amount by the number of years you need to provide income.
Here’s an example:
- Final Expenses $10,000 for funeral services and 20,000 for outstanding end of life bills.
- College Tuition- $50,000 to defray a portion of college costs for one child at a four year university
- Mortgage and other debts- $100,000 to pay mortgage down to zero and $10,000 to pay off all credit cards.
- Income replacement- (broken down by month)1. Childcare for 10 years at $400 per month = 48,000
- Food, clothing, utilities and miscellaneous $2000.00 per month 20 years.
Total for income replacement= $528,000
Grand total for all categories =$766,000
While this number may seem like a lot, buying term insurance makes it more attainable and affordable. For instance, a 40 year old female who is a non smoker can get a 20 year $800,000 policy for about $65.00 per month! That’s about $16.25 per week.