To accurately calculate how much life insurance you need, first we need to determine if you actually need any coverage. Life insurance protects the persons that depend on your income if you die prematurely. It also can provide a continuous income to family members to pay for ongoing expenses and other legal medical and funeral costs.
If a lump sum is needed to purchase a business, or protect a business from takeover, the funds become quickly available. Often, a family is forced to sell or liquidate a business at below market-value, because of taxes or other immediate obligations. The tax-free death benefit can help solve that problem.
With lower interest rates and current investment rates of return, it now takes more dollars to generate the same income that was possible 20 years ago. Thus, unless an unacceptable amount of risk is taken, more coverage is needed to provide the same level of protection. NOTE: The death benefit of life insurance proceeds is typically federal tax-free!
If you have dependents, or your current debts are higher than your assets, you probably need to purchase a policy. Your current health will help determine what rates and options you are eligible for. Choosing the correct face amount will depend on four factors:
· Future Financial Obligations: Children’s education and outstanding mortgage are two of the biggest financial expenses many families face. Although the outstanding mortgage amount is reducing (unless you refinance or buy a bigger home), the cost of a college education usually increases every year. Assuming an in-state tuition will reduce the amount of needed life insurance coverage. Purchasing state tuition credits will lower your out-of-pocket costs. But it will also force you to select a college within one state only.
· Replacement of Income: If you are the sole or principal provider of income for your family, you need a policy large enough to replace that income. Of course, the younger you are, the greater the potential lost income, and accordingly, the need for a larger face amount of coverage. Assuming a 7% return on your investments, you would need a $715,000 policy to provide $50,000 of continuous income to the beneficiary. A 9% return would reduce the required face amount to approximately $450,000. However, a more realistic 5% rate of return will require $1 million.
· Your Budget: Perhaps the most important factor in determining how much coverage you need is the dollar amount you are willing/able to spend each month to pay for the policy. If you do not have the available funds to purchase enough life insurance coverage, then reducing the face amount of the policy or selecting a shorter period of term coverage will lower the rate. Cheap 20-year term rates are typically available, but you may not need coverage that long.
· The Amount Of Debt You Have: Your debt consists of mortgages, credit card balances, car loans and any other money you owe to a third party. Credit card debt would be the main priority because of the high interest rate on the outstanding balance. Paying off debt is essential if the principal source of income is no longer available. Fortunately, interest rates are much lower compared to 10 years ago. But without good credit, obtaining the lowest borrowing rates can be difficult.
For consumers, one of the hardest tasks is calculating the correct amount of coverage to purchase, from whom, and the type of policy. Ten years of salary is a good starting point, although many other variables can increase or decrease the amount. An annual review should always be performed.
Also, it's critical to understand that life insurance should never be treated as a retirement plan. Although significant cash values can accumulate (permanent plans), borrowing or withdrawing these funds can drastically impact the most important feature of the contract - the death benefit.
As the premier resource for affordable life insurance plans, we shop and research all of the top companies, and present the best options for your specific needs. Only “A” rated carriers are considered and online quotes are available at any time. The type of product is equally important to its cost. And of course, calculating the appropriate face amount of coverage will provide you with the most cost-effective policy.