Life Insurance - Assessing Your Needs
Assessing how much life insurance you need is an important step in the process of getting a policy. You need consider your debts, assets, future expenses, providing for your family and balance that with what you already have.
The following chart will help you organize yourself and help you figure out the face amount that fits your situation. Consider all these things to decide how much is right for you.
Part 1: Assessing your Debt & Final Expenses
- To pay off your mortgage
- To pay off your other debt - Loans, credit cards, bills
- To pay for your child's education - $10,000 per child per year is typical
- To pay for unforeseen expenses - 3-6 months salary is a typical "cash reserve" to cover emergency expenses.
- To pay estate taxes - If your estate is worth less than $2 Million you will likely not be subject to estate taxes
- To pay off your funeral and final expenses - $10,000 is typical
Part 2: Providing for your Family
- Annual income you wish to provide for your family upon your death - 70% of current income is typically selected
- Number of years for which income is to be provided - You may wish to provide an income until your spouse retires or children reach independence.
Part 3: What you Already Have
- Existing Insurance - Life insurance, mortgage insurance, etc.
- Liquid Assets - Cash on hand, investments
- Company and Government Benefits - Pensions and other sponsored benefits
- Other Assets - Income-producing assets, such as rental property, etc.
After you have decided if you need life insurance or how much you need, there are several ways to approach coverage.
- Get a permanent policy (Universal Life or Whole Life) - These will cover you to age 100 and in some cases provide cash value, dividends, tax deferred growth and other benefits.
- Get a term policy - If your needs are short term (i.e. Mortgage or other loan), you can get a policy to cover that time period. Generally the terms available are: 5, 10, 15, 20, 25 or 30 years.
- Or do a combination of both - You will always have some kind of need (burial expenses, estate taxes etc.) so you can get a permanent policy to cover these and another term policy to cover your family in the next 10, 20 or 30 years.