If there is one question we get asked the most regarding life insurance it’s, “How much life insurance do I need?” or “How much life insurance should I purchase?”
To be completely honest this is a great question and one I believe needs answering. We find that often times husbands, wives, mothers and fathers put off the decision to purchase life insurance because they are unsure of how to answer questions such as the ones we are posing above.
With this question answered I believe that it will give those individuals who are putting off the decision to purchase life insurance more ammunition to make an informed decision.
Life Insurance Needs Calculation: Three Methods You Can Use
Method #1: 10 Times Your Income
This is the simplest and oldest method of determining how much life insurance one could acquire to protect their income for their dependents. The thought behind this method is that if a breadwinner were to pass-away their family would be able to make ends meet if they acquired enough capital to cover the breadwinners annual income for 10 years (some prefer to estimate 15 or 20 times annual income).
Method #2: (10 x Income) + Mortgage Balance
This is yet another simple method of determining how much life insurance someone could buy to protect their family’s income. You are simply taking method #1 mentioned above and adding your home mortgage balance to the total. The thought behind this is that if something were to happen to a parent the family left behind would receive enough cash to pay off the family’s home so that they may live free and clear of rent or mortgage obligations.
The benefit now over method #1 is that since the family has paid off their mortgage they are then left with the entire benefit amount of 10 x the income of their passed income earner. This allows them to use the entire amount of lost income towards other life necessities rather than mortgage and rent.
Method #3: Life Insurance Needs Analysis
The best and most comprehensive method of determining how much life insurance an income earner should purchase to protect their dependents is called the Life Insurance Needs Analysis. This analysis takes into account:
– Current income
– Other income
o Social Security
o Survivors income
– Final Expenses
– Emergency Funds
– Education Funds
– Mortgage balance
– Other Debt
Income Producing Capital:
– Liquid Assets (Cash, savings, securities, 401K etc.)
– Existing Life Insurance
The benefit of this approach is that through a brief analysis it takes into account your family’s financial situation. What you would do with the information above is add each section up. You would first determine what your family’s Income Needs are by figuring out how much income your family depends on each year. Your income needs will be about 70%-80% of that figure
You would then add up all of your Cash Needs and add that figure to your family’s Income Needs. Once you have that figure that represents your Income + Cash Needs you would subtract that from that your Income Producing Capital figure. This will inform you that you have either a financial shortage where life insurance should be purchased to fill that gap or you will determine that through all the income producing capital you have there will not necessarily be a need to purchase additional life insurance. You may even find that you needed a much smaller policy that first thought. This may allow you to get life insurance without a medical exam and avoid the long process of a standard policy. If you happen to be looking for FEGLI life insurance we can help you find that coverage as well.
Now that you have a basic understanding of three methods you could use to determine how much life insurance you need feel free to utilize our handy dandy Life Insurance Needs Calculator. This calculator will take into account all the information we touched on for method three and calculate it all for you. Or if you are ready to get started with your own quotes then use the form on this page to get started with term life insurance quotes or give us a call to speak with a life insurance specialist.