If you’re thinking about purchasing a new life insurance policy, how much life insurance you need is, quite literally, the million-dollar question. Unfortunately, there may be agents motivated to sell you more coverage than you can afford. To avoid getting stuck with a policy that’s not right for you, follow these four steps to estimating how much life insurance you should buy.
Life insurance step #1: Consider your income
Estimating your life insurance coverage starts with calculating the cost of replacing your annual salary. That figure is going to depend on your age. As people age, they usually have higher salaries and they always have fewer years of income to replace. The most common rule of thumb is to insure yourself for between 5 and 10 times your annual salary, depending on how much money will be left after paying off all your bills.
Life insurance step #2: Factor in debts and other expenses
After you have considered replacing your income, factor in debts like credit card balances, auto and personal loans and mortgages. The biggest thing that you need to take into consideration are your survivors’ future expenses, such as funding for your children’s education, family expenses, and the cost of supporting your. Once you’ve calculated how much it will cost to replace your income, start adding in your portion of all of your family’s long-term financial obligations including mortgage, college tuition and car payments, credit card bills, child support and spouse support. If you’re a single parent or your household’s sole breadwinner, your insurance should cover 100 percent of these expenses. Those who live in dual income households can insure for less.
Life insurance step #3: Weigh end-of-life costs
If you’ve made it this far, you’re almost done. The last thing to add is your final expenses – the cost of burial, end-of-life medical fees and estate-settlement services.
Unfortunately, these can add up fast, leaving a huge fiscal burden for your survivors if your life insurance doesn’t cover it. For example, the National Funeral Directors Association reports that the average cost of a funeral – not including cemetery plot, headstone or flowers – is $6,560. According to the Life and Health Insurance Foundation for Education, a nonprofit insurance education group, you can estimate your final expenses by tacking on $15,000 or 4 percent of your estate – whichever figure is larger – onto your life insurance calculation. Keep mind that if you pass on an estate worth $5 million or more, your beneficiaries will have to pony up a larger chunk due to higher estate and inheritance taxes.
Life insurance step #4: Do some subtraction
If your figure is reaching gargantuan levels, don’t worry – now you get to take out a few things. Subtract out:
- Taxable assets
- Capital investments
- Life insurance you already have
- Retirement savings
If you’re married and don’t have children, you can also calculate your spouse’s income replacement and subtract that out. If you need some help with the math, www.bankrate.com’s Life Insurance Calculator can get you started. Regardless of what figure pops up, remember that it’s just an estimate. Consider consulting an independent insurance professional before buying a policy, especially if you have outstanding circumstances such as abnormally high ongoing medical costs, or aging parents or relatives who depend on you financially.
Contact us to see if you can save money on your insurance by speaking to a professional independent insurance agent at Journey Insurance.
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Journey Insurance Agency * Irvine, California * 888.323.7480
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