How Much Life Insurance Do I Need?
Buying the adequate amount of life insurance is very important. The last thing you want to do is leave your family financially vulnerable if you were to pass away unexpectedly. Some financial experts suggest an amount equal to 7 to 10 times your income. Some people simply choose to cover an amount equal to their mortgage and other debts. The fact is that you should take a more comprehensive approach to determining your life insurance needs, taking into consideration the following factors:
Outstanding Debt – It is a good idea to take a look at your current and long term liabilities. You should consider obligations such as your final expenses, personal debt (credit card, car loans etc.), mortgage balance and even future debt like college funding for your children.
Income Replacement – One of the main goals of owning life insurance is to replace income lost if you were to pass away prematurely. Considering the fact that California has one of the highest median incomes in the country, replacement of income should be a high priority. You can adjust the income amount a bit considering the fact that part of your death benefit will be used to pay household debt down or to pay it off completely and in most cases it is received tax free. You can also make adjustments if your surviving spouse plans to work after your death if they do not already do so.
How Long Until Retirement – This is important for a couple of reasons. First it will determine how many years of income you will need to replace. For instance, if you are 35 and plan on retiring at 65, you might considerer replacing 30 years of income. It will also help you determine the duration of your policy if you choose a term product.
Savings, Investments and Other Life Insurance – You should consider all of you assets such as savings and investment accounts. Be careful about considering your 401k and IRA balances as there might be taxes and penalties if your beneficiaries choose to tap into these funds early. You should also consider any life insurance that you have outstanding.
After Tax Yield and Inflation Rate – These factors are important considering that the death benefit left to your beneficiaries should somehow be invested. They will also help determine how much death benefit you will need in present dollars to adequately support beneficiaries in the future.
Calculating Your Life Insurance Needs – The good news is that no math will be required on your part! There are many excellent life insurance calculators available online that do all of the work for you. Our favorite is the needs calculator at lifehappens.org. It will take in to account all of the factors above and even generate a PDF of your results. Simply click on the link below.
How Much Life Insurance Can You Get? – As a general rule, life insurance companies limit the amount of life insurance based on your age and income. This term for this is ‘financial underwriting’. The point is to ensure that you are applying for a reasonable amount of coverage compared to your needs. Companies use a multiple of income which is higher when you are younger and decreases as you get older. For instance, if you are 35 years old and make $60,000 per year, you might be capped at 30X your income or $1.8 million of life insurance coverage. This should be more than enough for most people. If more coverage is needed, the insurance company might allow it if you can justify why it’s needed.
If you need help determining your life insurance needs we can help. We will take all of your coverage goals into consideration and help you decide on an amount that is right for your situation. We will then shop your case to over 40 top life insurance companies to find you the best rate based on your needs. Give us a call at 877-205-4172 or email us at firstname.lastname@example.org for a no obligation consultation.