How Much Life Insurance Do I Need?

How Much Life Insurance You Need

Life insurance provides your loved ones with cash if something happens to you.

It is a truly selfless gift that ensures the people you care about are looked after. Subsequently, the most common question we are asked is, “How much life insurance do I need?” The following is a step by step process meant to help you arrive at this number. It will take a few minutes for you to get a handle on it and is best done with your partner, if applicable.

The first part is easy: whatever the size of your mortgage – cover it with life insurance. The second part requires more work: how much cash will be required to pay for last expenses, other debts, ongoing monthly expenses, and provide for the children’s education? This form will help you gather all the applicable information for this step.

Once you have the monthly expenses, you can enter it all into a life insurance calculator to discover how much life insurance you will require. You should do this for both spouses (if applicable), as the amount of insurance required is usually different for each spouse. The following information is required for the calculator:

1. Final Expenses:

This can vary dramatically depending on your wishes. The important point is to discuss what kind of a funeral and final arrangements you want – if not, your spouse/family will likely spend far more than you would expect, out of grief. Read Is Preneed Funeral Planning Worth the Investment for questions you need to discuss now with your family.

2. Pay Off All Mortgage Balances:

If you have a mortgage, enter the amount still outstanding.

3. Pay Off All Loans or Debts:

This is for credit card debt, lines of credit, car loans, and leases etc.

4. Education Fund for children:

This can range from the costs of studying while at home (at $10,000 per annum) to providing funds to go to a university away from home (which would exceed $25,000 per annum).

5. Other Cash Needs (taxes, emergencies):

Enter your projected miscellaneous cash needs.

6. Annual Family Income Needed (Minus Spouses Income):

Enter the annualized monthly expenses you calculated from the expense sheet less what your spouse earns. If they are a stay-at-home parent or you would want them to be at home more, you should assume no income or reduced income for your spouse.

7. Number of Years Above Income Required:

How many years will your loved ones require this income? If you children are younger, it could be a couple of decades – usually ten years is a minimum.

8. Estimated Interest Rate Earned on Invested Income:

The money will be received by your spouse – how will it be invested to generate an income and hopefully have some left at the end. I usually recommend 2% more than the inflation rate you choose in Section 9. So if you choose 2% inflation in section 9, select 4% as a return to be very conservative.

9. Estimated Annual Inflation Rate

We are currently at around 2%, so choose this to be conservative. If it increases, your conservative return should increase in proportion, yielding at least 2% more than inflation.

10. Reduce the Requirement by Savings and Investments You Could Use.

I generally leave this at zero as the spouse will need some funds for retirement.

When you finish importing your numbers into the life insurance calculator, click the “compute” button. It will provide the amount of life insurance you require for paying off debt plus the amount for daily living expenses and the total. If you do it for each spouse, then you will have the two amounts.

Now you can talk with an insurance advisor as to what kind of insurance would best balance your needs with your budget – term or permanent and what kind of insurance would work best within those types.

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