Here are figures and calculations you should consider when determining how much life insurance you need to buy in order to protect your loved ones.
You may have heard that all you have to do to figure out how much life insurance you need to buy in order to protect your spouse, children, or other loved ones should you pass away unexpectedly, is to take your salary and multiply it a certain number of times.
How many times you have to multiply your salary depends on who you talk to or which website you visit, of course, with some of these sources suggesting that purchasing enough life insurance to cover five, eight, or 10 times your annual income is all you need to properly provide for your family, while others offer up calculations that are as high as 20 times your annual income.
These figures are arrived at via all sorts of different methods and for all kinds of different reasons, but one thing seems pretty obvious about all of them: they’re likely to act as little more than inadequate guesstimates if your goal is to keep various people in your life safe and secure if something happens to you.
What’s a better method for coming up with how much life insurance you have to buy to take care of anyone you may leave behind?
The most straightforward answer to this question involves sitting down with a qualified insurance professional and hashing out all of the pertinent details in person.
If that’s not an option for you, though, another possibility is to make use of one or more of the many online calculators that exist to help people like you determine just how much life insurance you should buy based on a host of different factors, figures, and situations.
Jim Kinmartin, CPCU, of Torrance, California-based ISU Insurance Services, supports the second suggestion, saying, “anyone can go online and find a variety of calculations that will give one an idea of how much insurance is right for them”—although he reminds that the figures that result from those calculations are sure to vary “by the individual's personal needs and views.”
That’s because, as Sam Perez, a Miami-based agent with Western & Southern Life, reminds, life insurance “can be used to plan for many events: debt cancellation, estate planning, tax planning, retirement planning, dependent college planning, [and] business succession planning, among others.”
Should you go with one of the above-mentioned options rather than take the “multiply your annual income a certain number of times” route, you’ll want to do so as prepared as possible—which is where the information shared below should come into play.
Although some of what’s shared from here on out may seem complicated—certainly more complicated than simply multiplying your salary a specific number of times—the fact is that even the process of having a one-on-one with an insurance agent, or the process of filling out an online calculator, can be quite straightforward and streamlined.
After all, once you’ve determined that, yes, you actually need some amount of life insurance (because, say, there are people in your life who depend on your income—in which case you’ll probably want to go with term life insurance over the traditional or “whole life” variety, by the way), the next thing you have to figure out is exactly how much money those folks are going to need to meet their immediate and ongoing financial needs should you pass away.
Specifically, here is a rundown on some of the information you’re probably going to be asked to compile and share should you approach an expert for assistance or should you turn to the various life insurance calculators that can be found online:
Note: it’s also possible you’ll need to determine or share some of the following, depending on the agent or other expert you employ or the online calculator you decide to use:
According to the Insurance Information Institute, here are a few additional expenses—many of which tend to be ignored or overlooked--you may want to consider before you meet with an agent, reach for a physical or online calculator, or otherwise attempt to figure out how much life insurance you have to purchase to allow loved ones who rely on you for support to maintain their current lifestyles:
Although you’re pretty much on your own when it comes to filling in the details related to all of the areas mentioned above, doing so will go a long way toward providing you with the clearest possible picture of how much life insurance you should purchase to provide for or take care of your spouse, children, or other family members or loved ones in the event that something happens to you.
Just remember that life insurance is a very personal matter—and that’s meant in more ways than one. In other words, the amount of life insurance that is “good” for you and your current situation may not prove to be as perfect of a fit for someone else, especially if that person’s circumstances are different from yours (as they are likely to be). The same is true of the reverse, too, of course—so, just because a particular amount or type of life insurance has worked well for a family member, friend, or some other acquaintance, that doesn’t mean the same amount of coverage will fit your specific needs.
“The amount of coverage a person needs is going to depend on their life circumstances,” says Michael Barry, the Insurance Information Institute’s vice president of media relations. “For instance, a prospective policyholder who has three children, all of whom have yet to attend college, is generally going to want more life insurance than someone who is single, with no dependents at the moment.”
All of which should lend additional support to the notion that after you’ve come to the conclusion that you need some amount of life insurance, it’s better to work with an experienced professional in this area, or at least spend some time tapping through an online calculator or two, than it is to cut corners and go the easy route described at the beginning of this article.
“Life insurance calculators are useful tools that [consumers have access to nowadays] to compare cost,” Perez shares. However, as mentioned earlier, insurance is a vehicle that can be used for tasks like tax and retirement planning, and “only a qualified and experienced licensed insurance professional has the know-how to help the consumer [in those areas]. The consumer will not get such advice with an online-premium comparison application.”
A: Although these kinds of calculations simplify the sometimes-confusing process of purchasing a life insurance policy, they actually simplify it too much. Most experts believe you’ll be far better off--and your spouse, children, or other dependents will wind up much more secure--if you walk through the process with an experienced professional or even if you make use of one of the many life insurance calculators that can be found on line. (Almost every insurance provider in existence has one on their website these days.)
A: According to Kinmartin, carriers typically “will not issue a [life insurance] policy with a death benefit amount of more than 14 times an individual's income, but there are always exceptions--especially when it comes to insurance for business continuation planning and estate tax planning.”
A: One aspect of this process a lot of people surely overlook when calculating how much life insurance coverage they should purchase revolves around the charitable contributions they would like to be made in their name if something should happen to them.
Another often-ignored component involves all of the costs that would be tied to any “life changes” your loved ones may want to make if you passed away. A couple of examples include going to school, going back to school, or moving to a different city or state.
A: If you don’t have any dependents, it’s quite possible you won’t have much of a need for a life insurance policy. This is especially true if you have saved or invested enough money to cover your so-called “final expenses,” which can include things like the remaining balance on your mortgage, medical bills that remain unpaid, and any other outstanding debts that your survivors may have to deal with after you’re gone.
If you there are people in your life who depend on you and your income, though, and if you don’t have enough money saved up or invested to provide for their needs if you’re no longer around, you’ll probably want to at least take a look at what the various kinds and types of life insurance could offer you in terms of a safety net.
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