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Life Insurance: How much do I need?

Posted on | December 21, 2007 |

Choosing the right amount of life insurance is a daunting task. The most important thing to keep in mind about life insurance is this: the primary purpose of life insurance is to replace the income of the insured should the unthinkable happen.

The proper amount of life insurance is unique to each person’s financial situation. There are literally hundreds of insurance calculators on the web (a quick Google search for “life insurance calculator” returned 4,520,000 results!), but they’re only as good as the information you provide. So, figuring out just what expenses you’ll need to cover is crucial.

The first question you need to answer is: Who’s expenses am I covering by purchasing life insurance?

The most likely answer is your spouse and any children who are not yet grown. But in some cases, people just want to ensure that their debts or funeral expenses don’t burden other people in their life.

In the case of your spouse, you should be looking to cover your own income and any expenses you leave behind. The goal here isn’t really to ensure that your spouse never has to work again. This would be nice, but it can make the difference between affordable coverage and no coverage.

Here are some of the more common “big ticket” items to consider:

  • Living expenses.
    Determine how much money your family will need to maintain their standard of living. This includes groceries, taxes, gas and utilities, car payments, etc…. If you have a budget, then you’re all set, but be sure to subtract your spouse’s income. You will also want to figure out what your expenses are per year, and then multiply that out by the term (for example, 20 years).
  • Funeral expenses.
    Funeral expenses run, on average, from $4,000 - $10,000. This is a one-time expense.
  • Mortgage and other loan payoffs.
    The idea here is to provide enough so that your family can erase any debts you leave behind and start with a clean financial slate.
  • College expenses.
    Be sure to factor in sending your children to college. Again, it would be nice to provide junior a loan-free trip to a private school, but you don’t want to break the bank with this insurance premium. A Good rule of thumb is to provide at least what you expect to provide assuming you don’t die prematurely.

For example, if junior knows he’s looking at some assistance from the bank of mom and dad but he’ll have to take out loans to cover the difference, then that should be your goal with your coverage as well. The same thing goes for public vs. private school. Don’t factor private school into your insurance policy if you were only going to cover public school.

Of course, this is just to get a ballpark amount. If you find an agent you’re comfortable with and the difference in premiums between the amount to cover full tuition and partial tuition are small enough that you can live with it, then by all means go ahead.

You should only contact an Insurance Agent after you’ve done your homework. If you’ve done your homework well, then the number they provide should be in the ballpark of your own. On the other hand, he tries to steer you toward a significantly larger amount of insurance than what you determined you need and he can’t give a solid reason (you forgot to factor in your own student loans to be paid off), find a new agent.

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