Are you planning to buy a life insurance plan but cannot decide how much life cover you need?
You are not alone. A number of people keep postponing the purchase of life insurance just because they do not know how much life cover to buy. It may sound tricky at first to figure out how much life insurance cover a person needs. But, in reality, it takes only a few simple calculations to find the answer.
Let’s help you with your calculations.
First of all, ask yourself, why do you need life insurance? Do you need life insurance at all?
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If you have dependent members in your family, life insurance is a must-have for you. Life insurance ensures the future financial security of your loved ones in case of your untimely death or any financial exigency in the family.
There are different types of life insurance products available in the market. The sum assured amount varies depending on the type of plan you choose.
However, term plans and whole life plans are the two types recommended by most financial experts. These two types of life insurance plans offer life coverage higher than any other savings or investment oriented life insurance products in the U.S. If your primary objective is to secure your loved ones against any financial exigency occurred after your death, a whole life or universal life insurance is what you need. But if you want to secure your family financially against the loss of income caused by your premature death, term insurance is your best bet.
A number of Americans, who have a stable job, get life insurance from the employer. But, the life insurance covers offered by those plans are lower than individual policies. Moreover, these life plans cover your life for as long as you work for the employer.
As per a report published by LIMRA, fewer than half of the Americans who are aged between 25 and 64 years and have an annual family income between $35,000 and $100,000 have their own life insurance policy. The total number of lives covered in America is disappointing as it indicates the lack of insurance literacy in the country. Most people do not know why and how much they should buy life insurance.
Determining How Much Life Insurance a Person Needs
There are a few factors based on which a person can determine how much life insurance coverage he/she needs. Here, let’s go through the factors in detail.
1. Your Monthly Expenditure
The first and most important factor to determine how much life insurance you need is the monthly expense of your family. How much money you need, every month, to maintain the living standard of your family? Do you have a mortgage or any debt to repay?
All these things must be accounted for before deciding upon the amount of money your family requires in case of income loss caused by your untimely death. Let’s say, for example, your annual salary is $30,000 and the monthly expense of your family is around $2,000. You have bought a life cover of $500,000. Your family receives the entire amount in the event of your death.
Now, the amount is quite sufficient for your family. But in case the monthly expenditure of your family was around $3,000, the yearly expenditure is around $36,000. In that case, $50,000 will not be sufficient for your family as it will financially support them for a period not more than 15months or so. Therefore, you must calculate the monthly (as well as yearly) expenses of your family to know how much life cover you need to buy.
2. Your Financial Goal
Your financial goal refers to the amount of money you wish to have in your corpus so that you can maintain a better lifestyle in future or purchase something that you have always dreamt of (a house, a luxury car for example). In order to achieve your financial goal, savings is very important. If you want life insurance for your post-retirement years, and you have a significant amount of savings in your bank account, you will need less term insurance.
Pension plans or endowment plans are best for those who want life insurance for saving purpose. But, if you need life insurance for the future financial security for your family in your absence, there should be no compromise on the amount of life cover you need. The higher life covers the better.
You should have enough coverage to pay for your financial liabilities as well. So, it is very important to outline your financial goal as well as the cash-flow needs of your family. This will help you figure out the estimated amount your dependent family would require after your untimely death.
3. Available Financial Resources
It is necessary to calculate the financial recourses as well as the total annual income of your family. Do you have any savings (short- or long-term)? What is your spouse’s annual income? You need to add up these amounts with your 401(K)s, IRAs, emergency reserves, 529 plans, estimated social security survivor benefits and the existing life insurance plan (if any).
Now, find the difference between all the available resources you have and the financial needs of your family. This will help you figure out how much life insurance cover you will need for your family to sustain themselves after your death.
Your financial planning remains incomplete without taking inflation into account. As years go by, the cost of living goes up. In other words, the general level of prices for goods and services increase with time.
Consequently, your current family expenditure will double within a few years (resulting in an obvious increase in your salary as well). So, while estimating the amount of life insurance you need, you must factor in inflation to understand what your family’s financial needs will be in future.
It is also better to find a reliable premium calculator, which will help you find calculate the current rate of inflation and give an estimate of how much life insurance you can get with the premium you can afford.
Life insurance is an integral part of financial planning and its importance in our life is undeniable. So, if you have always stayed away from buying a life insurance plan just because you had no idea how much life insurance you need, it is time to be serious about the future of your dependent family.
Since life is uncertain, it is necessary to provide your family with as much financial security as possible, in case you are not around in future. So, consider the factors mentioned above to understand the amount of life insurance cover you require and based on your financial capability, buy a policy that suits your requirements best.