Life insurance is one of the wisest purchases that you’ll ever make for your loved ones. Nobody wants to think about something tragic happening to them, but not planning for the evitable could leave your family with a mountain of debt. When you’re shopping for life insurance, there are dozens of different factors that you’ll need to consider to ensure that you’re getting the best plan possible.
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 enough life insurance is one of the worst mistakes that you can make for your family. If something tragic were to happen to you, and your plan was too small, then your family could be left with a massive amount of debts and other final expenses. Losing a loved one is never easy, but having financial struggles on top of that 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 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).
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 is going to have 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 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.
There are some advantages and disadvantages of no medical exam plans that you should be aware of when you’re shopping for insurance coverage. One of the most notable advantages is that you can be approved much faster than you can with a traditional life insurance policy. 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.
Some of the disadvantages are that they are going to be more expensive than a plan that requires an exam and you could be limited on how much life insurance you can buy through a no exam plan. Most insurance companies will only let you buy around $250,000 worth of insurance, which isn’t going to be enough coverage for most families.
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.
Getting an Affordable Life Insurance Policy
After you’ve calculated your life insurance needs, you may be surprised to see how much life insurance your family will need 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 several ways that you can secure better premiums from the insurance company and keep more money in your pockets.
The first thing that you should do is cut out any tobacco that you currently use. If you smoke cigarettes or use chewing tobacco, then you can expect to pay more for your life insurance. Anyone that uses tobacco is going to be viewed as a higher risk to the insurance company, and they are going to offset that higher risk by charging you more every month. Smokers pay twice as much for their life insurance versus someone who doesn’t smoke. If you want to get the most affordable plan, you’ll need to eliminate any tobacco that you currently use.
Another way to lower your insurance premiums is to improve your overall health. Before the insurance company approves your application, they are going to require that you take a medical exam, and the results of the medical exam are going to play a large role in how much you pay every month. If you want to save money, you’ll need to get better results from the exam, which means improving your health.
The two best ways to do that are by sticking to a healthy diet and getting exercise. Both of these can help you lose any extra weight, lower your cholesterol, and reduce your risk of being diagnosed with health complications. Not only will your doctor thank you, but your wallet will thank you as well. Improving your health will save you hundreds of dollars on your insurance premiums.
The best way to guarantee that you’re getting the lowest premiums is to compare dozens of quotes before you decide which one is going to work for you. Instead of wasting your time calling all of those companies, let our independent agents do all of the hard work for you. We can bring all of the best premium rates directly to you. We can help save you both time and money on your life insurance. Our experienced insurance agents have years of experience working with all types of applicants.
Calculating your Life Insurance Needs and Finding a Plan that Fits
One of the most common reasons that people don’t buy life insurance is because they assume that it’s going to 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. A lot of people put off buying life insurance, but you shouldn’t wait any longer to get the coverage that your family deserves.
Life insurance is the best investment that you’ll ever make for the future safety of your family. It’s one of the only ways that you can ensure that your family will have the money that they need, regardless of what happens to you. Because you never know what’s going to happen tomorrow, you shouldn’t wait any longer to get the insurance coverage that your family needs.
Calculating your life insurance needs can be a difficult process, and forgetting expenses could be a detrimental mistake. Not having enough life insurance is one of the worst mistakes that you could ever make for you loved ones. If something tragic was to happen to you, and your life insurance plan were too small, then your family would be responsible for additional bills and expenses. Our agents can walk you through the process to ensure that all of the categories are accounted for.
Nobody wants to think about his or her own death, but it’s vital that you plan for the worst. If you have any questions about how much insurance you need to buy or you’re looking to get the best plan possible, please contact one of our agents today. We would be happy to answer those questions and connect you with a quality insurance plan at an affordable price.