Life insurance is an important investment. No one wants to think about life going on without them in the picture, but not planning for the inevitable could leave your family with unmanageable debt.
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. Not having adequate life insurance will put a strain on your family. If you were to pass away and your plan was too small, then your family could be left with a massive amount of debt and other final expenses.
Losing a loved one is never easy, but having financial struggles as well, is going to make it much worse.
Life Insurance Needs Calculation: Three Methods You Can Use
Method #1: 10 Times Your Income
This is the simplest 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, it is ultimately up to you).
One of the best advantages of this method is how simple it is.
All that you have to do is take your salary and times it by 10. That’s probably math that you can do in your head. Not only is it easy, but it’s also pretty effective. But, the problem is that every person and family is different. Everyone has different life insurance needs. Some people are going to need more life insurance coverage than 10 times their 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 or rent.
Method #3: Life Insurance Needs Analysis
The 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
- Social Security
- 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.
Now that you have a basic understanding of the 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.
No Medical Exam Life Insurance Policy
There are some advantages and disadvantages of no medical exam plans.
Advantages of a No Medical Exam Life Insurance Policy
One of the most notable advantages is that you can be approved much faster. With a traditional plan, you could wait up to a month to get life insurance, but with a no medical exam you can be approved in days.
disAdvantages of a No Medical Exam Life Insurance Policy
Some of the disadvantages are: they are going to be more expensive than a plan that requires an exam and with most companies only offering around $250,000 worth of no medical exam life insurance coverage, you will be limited as to how much you can purchase.
Getting an Affordable Life Insurance Policy
After you’ve calculated your life insurance needs, you may be surprised to see how much life insurance is needed if you were to pass away. Don’t worry, in most cases, a life insurance policy will be more affordable than you may think, regardless of how much life insurance you need. There are numerous ways for you to secure better premiums.
First and foremost, you should stop using tobacco. If you smoke cigarettes or use chewing tobacco, then you will pay more for your life insurance. Anyone that uses tobacco will be viewed as a high risk, which will result in you being charged a higher premium rate due to that risk. Smokers pay much more for their life insurance coverage.
Second, better your health. Before the insurance company approves your application, they will require a medical exam to be completed, and the results play a large role in how much you pay every month.
The two best ways to do that are by sticking to a healthy meal plan and getting exercise. Both of these can help you lose those extra few pounds, lower your cholesterol, and help lower your risk of having any further health complications. Improving your health will save you hundreds of dollars on insurance premiums.
Instead of wasting your time calling all of those companies, let our independent agents do the work for you. We will bring you the best premium rates to compare. We can help save you both money and time on your life insurance.
Finding a Life Insurance Plan That Fits Your Needs
One of the most common reasons that people don’t buy life insurance is because they assume that it will be too expensive or that they don’t need that protection. We’ve already showed you some ways that you can lower your rates and find a plan that’s going to fit in your budget.
Calculating your life insurance needs can be a difficult process, and forgetting expenses could be a detrimental mistake. If your life insurance plan is too small, then your family will be responsible for additional bills and expenses. Our agents will walk you through the process to ensure that all of the categories are accounted for.
No one wants imagine life for their family after their death, but it’s vital that you plan for future.