Most of us know that we need life insurance, but it may be less clear if you have enough life insurance. According to a recent LIMRA study, 90% of us think that the primary wage earner in the family needs life insurance.[1] While you may think that the term policy you get through work is enough if something were to happen to you, would your family be financially secure?
It may seem like a daunting task, involving complex calculations and endless spreadsheets. A qualified financial professional can give you detailed insights into how you can secure your family’s future in case the worst happens. If you’re looking to gauge how much life insurance you need, consider the following four factors.
1. How much annual income will your family need?
It’s hard to come up with a total number for life insurance, but easier to think in annual increments. How much money are you and your spouse bringing in each year? Will you need that same amount to be comfortable in the future? More? Less? If your wallet is feeling light and it’s hard to make ends meet, think of what would feel comfortable and start there. Factor on all expenses that you pay each month such as rent, utilities, groceries, and insurance.
This isn’t a decision to make on your own – involve your beneficiaries and have frank conversations about what life would be like if you – or they – are no longer in the picture. Whether that’s your spouse or dependent parents, understand what they would want if you can no longer contribute financially.
- Will beneficiaries be able to keep working at their current jobs without your support? If they are becoming the primary caregivers to your children, that may no longer be possible.
- Are they satisfied with your annual household income? Your perceptions of how easy life is at your current budget may be different.
- Do they want to continue living in your home? Your spouse may want to move closer to family or downsize if they are alone in your home.
Determine a hard number to start with, based on your current income and your beneficiaries’ wishes.
2. For how many years will they need that income?
Consider how long your family will need to maintain their current cost of living.
How much longer will your children be in school or living at home?- If you’re married, does your spouse have a separate income and retirement savings?
- Does your spouse have any other revenue that kicks in at a later date, such as a trust or inheritance? Your family may need less annual income after that time.
It’s important to know the maximum number of years you’ll need your insurance to provide for your family. Multiply this by the annual income you’ve estimated.
3. Take debt, funeral expenses, and other obligations into account.
Do you have consumer debt or a mortgage? If so, it’s a good idea to have enough insurance for your family to pay off those accounts and have income left. It’s also a good idea to make sure your children’s college educations are taken care of. Add these debts and obligations to your total.
4. Factor in your current savings.
If you have savings, other existing insurance policies, and you’re on track with your retirement accounts, you can subtract those assets from the total amount your insurance policy will cover. Make sure that you have kept track of all your accounts and listed your beneficiaries on retirement, pension, and life insurance policies. Keep those records up to date if anything changes.
Remember that it is a general estimate of what you’ll want to consider when determining if you have enough life insurance coverage. The benefit of life insurance is that your beneficiaries will receive a lump-sum payment after your death – no probate or waiting. If you find that the estimated face value of your policy is untenable, work with an agent to determine how much your family would need to live comfortably. By investing a portion of the death benefit, your beneficiaries can plan for some growth in their funds before they need to use them.
When determining if you have enough life insurance, consider your family’s annual income, how long they’ll need to earn income at that rate, your debt, and expenses as well as any savings, inheritance or other earnings you have.
[1] 2018 Insurance Barometer Study, Life Happens and LIMRA
