Life insurance is a topic that concerns many people, yet very few actually take steps to make sure they are properly covered. According to a 2003 MetLife study, 49% of the respondents are concerned about their family's financial security in the event of their death or their spouse's death. However, nearly the same percentage of participants, 45%, had done no specific planning for premature death.
When it comes to life insurance, there are two mistakes you can make - not having enough, and having too much. How do you determine how much life insurance you need?
One basic approach for estimating the need is based on your annual salary. Simply multiply your annual salary by five to 10 and you have a potential value. While this method is easy, it fails to take into account your unique circumstances such as a mortgage, marriage, and the number of children. In addition, the range of insurance solutions can be quite broad depending on whether you use the number five or 10.
Another method for determining your life insurance need is to identify the specific expenses that will need to be covered when you are gone. Typically, six factors are part of this calculation - child care expenses, debt retirement, education funding (for kids or surviving spouse), income replacement, burial expenses and your current amount of life insurance.
If you should pass away, your spouse will most likely return to work to support the family, and child care could be a necessity. This expense can be crippling to any family's budget. To gauge this amount, multiply the annual child care expense by the number of years that care will have to be provided.
To retire some debt, you can add in an additional amount to the policy's death benefit to alleviate part of the financial burden should a premature death occur. Some of these debts could be mortgages, college loans, and auto loans to name a few. If you choose, you can also add in an amount to provide for your children's education. Depending on your situation, an amount may be included for the surviving spouse's education in order to support the family.
When considering income replacement, the amount will probably be less than your current salary on an annual basis because your personal expenses will no longer be an issue. Multiply the amount of annual income that needs to be replaced by the number of years you would like it provided. Don't forget to include the funeral expenses. This cost alone could typically run about $15,000, which does not include probate and legal costs.
Add up these expenses and subtract the amount of your current policy. Will your family have enough to cover these expenses with your current insurance coverage?
Estimating your need for life insurance can be confusing. Consulting an investment and insurance professional can help you determine a course of action for your specific situation. This person can not only help you determine the amount of insurance you need but also assist in determining how an insurance policy fits into your financial strategy. And, it is always a good idea to have an annual policy review with your advisor.
Securities offered through H.D. Vest Investment ServicesSM, a non-bank subsidiary of Wells Fargo & Company, Member SIPC.