How much Life Insurance is required?

How much is enough? Its a hard question to answer as sadly you won’t be here to collect it. The question should be how much life insurance do your dependants need? Would you like them to have the same living standards as they had when you are alive? Its not and easy question to answer and to can be harder to work out. How much life insurance do you need can sometimes put people off when they look at the numbers and decide its just too much. Today we will try to break it down in to easy segments and then see where we go from there.

End of life expenses

Lets get the hard one out of there way first. How much will the funeral cost? On average today it runs between $7,000 – $10,000. On top of this you need to allow for any State or Federal taxes plus any probate/legal costs.

Mortgage / Debts

By far the biggest debt you are likely to have is any outstanding mortgage. Unless there is any current mortgage protection of life insurance in force, this debt will continue and will require paying. Any outstanding loans (car loans or bank loans etc) should also be included in the amount to calculate here.

Education Costs

In its most recent survey of college pricing, the College Board reports that a “moderate” college budget for an in-state public college for the 2016–2017 academic year averaged $24,610. A moderate budget at a private college averaged $49,320. These figures include the Tuition and Fees, but financial aid is often available. These numbers are for each year so a 4 year budget per child should be considered.

Replace lost income

If the main wage earner dies, that income should be replaced. Remember this is the net after taxes and any other regular deductions have been taken out. Consider how many years this income will be required for and whether the spouse currently works or continues to work. The amount of money should be invested with a net return to equate to the income you are looking to replace. For example $500,000 invested with a return of 5% would produce $25,000 pa. When looking at this number consider any current savings and investments.

Consider any current life insurance policies

Any existing life insurance policies should be considered and the amount of life cover in effect taken off the total figures you have calculated. Also is there any life insurance in effect at work? Remember that the loss or change of a job can also mean the loss of any work related life insurance plans.

Donations and Gifts

Many people want to leave monetary amounts to loved ones or gifts to charity. These figures also need to be included in the calculations.

Investigate the cost of Life Insurance

Once you have an idea of the total required, investigate the cost of the policy. During this process ensure you obtain quotes from at least three different providers to compare the costs and benefits.

Life Insurance is often taken out with little thought to how much is actually required. Follow these steps to come up with a better understanding of the amounts needed to provide for your loved ones.