How Much Life Insurance Do You Need?

It can be difficult to decide how much life insurance to purchase. The answer to this question varies greatly by the person’s situation, debt and responsibilities.  You want enough to cover all the necessities and allow your family to live comfortably, but you don’t want to get too much and pay for unnecessary coverage.

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Calculating the amount of insurance to get can be done two ways. The first is a bit time consuming. It’s a needs based calculation. In this case, you need to estimate the amount of money from your income that’s necessary for your family’s needs.  In most cases, this is the amount you have left after taxes and contributing to your retirement plan or savings. Subtract that amount that your family would receive from other sources, such as Social Security . Some people feel that if the spouse doesn’t work, they could go back to work at that time. There is a problem with this hypothesis. Not only is it a difficult time for the remaining spouse, another change, such as a spouse working, would be equally as disturbing for a child. Since many people use term insurance to cover much of the expense, it’s only pennies a month to increase coverage and  insure your spouse doesn’t have to work.

If you have a mortgage, the amount of the mortgage needs to be added, as well as the amount of any other debt, such as credit cards or car payments.  You also need to add in the cost of final expenses, including additional expenses that may not be covered by health insurance.

If you have children, you also need to factor in the cost of college. Since the cost of college increases annually by about the same amount as interest grows, calculate in approximately $23,000 for four years at a public school up to $45,000 for four years at a private college.  You also need to factor in the cost it would take to replace the jobs you do around the house.  One estimate of the value of a stay at home parent was $112,000 per year to hire someone to do the jobs the parent does. Even working spouses have a value for jobs done around the house. Hiring it out can be costly, but not getting the jobs done or trying to do it all yourself might be even more costly when it comes to family relationships, personal time and good parenting. Total the amount necessary. From this total, you subtract retirement savings, regular savings and investments and any life insurance you already own.

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The second method is far easier. You can get a rough estimate of needs by multiplying your present post tax income by 17 to 20. Calculating how much life insurance you need should be done after any major change in your life. While the final calculations of both may be extremely large, it won’t have to cost that much to provide adequate coverage.  Term insurance is extremely low cost, but increases in cost as you age. However, many of the needs outlined above diminish each year, so you’ll need less insurance. By creating a combination of both permanent and term insurance, you can create a plan that will provide adequate coverage for the rest of your life.