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How Much Life Insurance Do I Need?
Article 2 of 9 in Getting the Right Life Insurance Policy
Once you decide that you need to buy life insurance to protect your family or dependents, you'll need to figure out how much insurance to buy and how much you can afford. You will want your beneficiaries to be able to use the proceeds of your life insurance policy to maintain the same or similar standard of living should you pass away. That means you need to purchase enough life insurance to provide for the people who rely on you, so take your time and make sure you purchase enough.
TIP: A life insurance agent can help you determine how much you need by looking at your lifestyle, beneficiaries, and your annual income. Contact a life insurance agent for assistance.
How to Calculate Your Life Insurance Needs
Some advisors suggest you buy a policy for 5 to 7 times the amount of your current salary, but the best way to determine how much life insurance to purchase is to do some simple calculation. Consider the following four factors:
- Your yearly household expenses: This is the amount your dependents will need to keep the same standard of living. This should include enough to cover your rent or mortgage, home maintenance and repairs, home improvements, household items, and real estate taxes and insurance. It should also include health and auto insurance, utilities, clothing, food, transportation and auto maintenance costs, plus child and dependent care, recreation and entertainment, and any other expenses they might have.
- Income from all your sources: Add up all income that would be available once you are gone. This would include your spouse's salary if working outside the home, social security benefits (easily obtained from the Social Security Administration), and investment income from all of the accounts you currently have. Do not include the insurance proceeds as income.
- Your debts: Calculate any and all debts you have and would like to eliminate if you should die. This would include credit cards, car loans and total amount owed on the home mortgage.
- Future expenses: This would include the average cost of a funeral, education for each child and other predictable expenses. Also estimate how long you think your spouse or any person depending on your salary might live. Then figure out how much they will need every year without your salary.
Add up a, c, d and subtract b and to find the amount of life insurance you will need. If you have other assets, and you would like to reduce the amount of life insurance you need to purchase, then you subtract your assets from the total amount of life insurance needed.
TIP: Your calculation will give you a general idea of how much life insurance you need. To fit your needed amount into your budget, talk to an experienced life insurance agent today. Once you know your needs, get several life insurance quotes to find the best life insurance policy for you.
Life Expectancy Calculators
One factor used by insurance companies when determining your insurance needs and rates is how long you might be expected to live. If you are young, healthy, and live relatively risk free then there is little need to factor in the life expectancy when you purchase life insurance. However, as you age or have health problems, then you may want to calculate your life expectancy before you buy insurance. Although no one can predict precisely how long any one person will live, for decades actuaries and statisticians have been tracking average life expectancy and the factors that tend to increase or decrease that expectancy.
Some of the most important factors that influence life expectancy are beyond our control. For instance, sex and genetic make-up are key factors in predicting longevity. Other factors that influence life expectancy are within our ability to change. Whether or not we smoke, what and how much we eat, how much we exercise, if we engage in certain sports (such as mountain climbing, scuba) and activities (piloting private aircraft), driving habits, the extent to which we use alcohol and drugs, are all factors that can influence life expectancy.
Several University of Pennsylvania faculty members ( Dean P. Foster, Choong Tze Chua, and Lyle H. Ungar) have created a version of a "Life Expectancy Calculator" that uses statistical data to customize a prediction of life expectancy based on individual risk profiles. Some factors are fixed (including year of birth or race), but other factors can be changed (such as health habits). FreeAdvice.com, in conjunction with the Editors of the Advice & Counsel Newsletter, are pleased to make this calculator available to you. You are welcome to try it out. For the Longevity calculator go to:
When you have completed the questionnaire, check out the impact that even small changes in your habits coud have on your life expectancy. The process can be sobering, but insurance agents use it to project how much insurance you need and should purchase.
Return of Premium Riders
A Return of Premium rider applies when you outlive your term life insurance plan. If you outlive the term of your term life insurance policy, you would have spent thousands of dollars on premiums and the insurance has expired without any tangible benefit for the money spent. With a return of premium rider, you get your premiums back tax-free.
There are disadvantages to return of premium riders, namely the added cost to your premium. Adding this rider to your policy can be expensive. On top of that, if you die during the term of the policy, the extra money you spent on the return of premium rider will not be returned. If you purchase a return of premium rider, you're basically betting that you'll outlive your term insurance. Instead you may want to consider investing what you would have spent on a rider in a Roth IRA (or another tax-free or tax-deferred investment) where you might get a better return on your money.
Do I Need an Attorney to Determine How Much life Insurance I Need?
While an attorney is not required, a review of your insurance may make you realize that you should obtain the professional advice of a lawyer. You may find, for example, that you require a new or revised will or legal documents. Perhaps you find the need to establish a Trust or an estate tax evaluation and plan. Contact an estate planning lawyer in your area if you feel you need legal assistance with a planning your life insurance policy and your estate.
Your life insurance needs change over your life time. If you have any life changing events, (death of a spouse, child, lost of a job, purchase of a house, purchase of a bigger house, birth of a child, marriage or divorce) you need to discuss your change in life insurance needs with a reputable life insurance agent. If any of these changes have occurred, request a life insurance need analysis review to determine how much life insurance you now require.
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