Figuring Out Your Life Insurance Needs

The various types of insurance are a necessary part of being fiscally responsible to both yourself and your family. In this day and age with the high cost of not only our material assets but the costs of living, and dying, it is only prudent to protect yourself, your assets and your loved ones with insurance that will ensure the security of your life’s work.

It is important to first establish that insurance, in general, is based on ‘What If? What if my house caught fire and burned down? What if it rained for forty days and forty nights?, What if I have a car accident?, What if I am injured in that car accident?, or just plain old fall grievously ill with cancer or some other horrible debilitating disease? In reality the most important insurance to have is the one that is NOT based on “what ifs”, specifically, life insurance.

No one has to ask ‘What if I die?’. The fact is, what you should be asking yourself is ‘When I die, what will happen to my family? My House? My Property?” Who will provide for them? Can my spouse or significant other support him or herself? If I buy life insurance how much do I need? How can I figure that out? All of these are compelling, yet difficult, questions to ask oneself. It is our nature to not want to face our own passing or for that matter even to contemplate it at all. In the next few of paragraphs I am going to address these questions and hopefully assist you with figuring out what your requirements are for “Life Insurance.”

The first question you have to ask your self is ‘Do I really need life insurance?’ The answer is unequivocally and simply, YES. Even if you are single with no children you should still at the very least have a minimum of life insurance to make sure that your family is not stuck trying to handle your ‘final expenses’. This is what people refer to as the “Needs Approach”. I truly despise the cold impersonal insurance lingo that refers to these costs as “clean-up funds”. I cannot easily think of a more demeaning and dehumanizing way to describe someone’s final costs. I prefer to think of the cost of dying as just that ‘Final Expenses’.

The easiest way to figure out how much insurance you should carry for your final expenses is simply to research your local market. The national average is nearly $6,000 and it isn’t unusual for a funeral to cost over $10,000! Once you know what the actual costs of your burial and funerary needs are in your area, you need to also figure out additional costs such as how much revolving debt you carry, tax burdens, mortgages and legal fees. Some of these legal fees can be avoided if you plan well ahead with a legal will to avoid a lot of problems with probate costs. If possible you can ease the cost of your monthly insurance premium by pre-paying some of the expenses. Plot, Casket, Florists and Parlor fees all add up so if you can buy some of these “up front” you can reduce your monthly premium costs considerably over the long term.

If you are, unlike me, married with children and significant financial responsibilities you would be better off using this simplified method for figuring your “Family care and Maintenance Policy”. This method uses existing data, namely, your current income stream, the percentage you are currently spending on your personal needs, and the number of years you want to provide for your loved ones after your passing. Say, for example, you have a wife who works part time while your children, ages 10 and 12, are at school. She currently brings in 20% of the family income ($12,000) and you bring in the other 80% ($48,000). You want to provide for sure for your children thru college completion, which is based on the youngest child is 12 years. Additionally you want to make sure you give your wife a chance to get up to speed after your passing. Whether, this is thru continuing education, moving to more hours at her current job or both. So you allow another 3 years for this. This comes to a total of fifteen years. This gives us our basic data to figure out how much Life Insurance you will need. You take your income stream of $48,000 less the estimated $13,200 you spend annually on your personally needs for a new balance of $34,800. ($48,000 – $13,200 = $34,800) When you take these returns times your net income stream of $34,800 you get $522,000. (15 x $34,800 = $522,000) You then take these funds times the assumed return on the after tax, after inflation on the insurance your wife collects from the insurance company. This will generally be about 90% of the actual policy value. ($522,000 x 90% = $469,800) Seeing as your interest, inflation and taxes will vary from time to time I would just round it up to a cool $500,000 and call it good.

As a married person, in addition to this “care and maintenance policy” of $500,000, I would suggest you also carry a separate smaller policy to handle your “Final Expenses.” This would prevent any confusion as to your final wishes and allow for the larger policy to be conveniently reworked as your life progresses and circumstances change, such as your children graduating from college for example, this would allow you to reduce your coverage and lower your premiums more and more as you approach your “Final Transition”.

You can also consider money back life insurance, as the name suggests, a money-back policy is a policy which gives money-back at regular intervals. This money-back is paid during the plan tenure and is a percentage of the Sum Assured.

Keep in mind that this is meant to be a simple common sense guide on how to figure out how much life insurance you should carry for yourself. It does not address the many different kinds of policies out there such as Term, Whole or Universal Coverage.