How Much Life Insurance Do You Really Need?
You realize that you need life insurance. Congratulations! Now the question is…how much do you need? The last thing you want to do is leave your loved ones short-changed if you pass away unexpectedly. There isn’t a perfect method for determining how much life insurance you need as life brings many changes which could impact your needs. It’s been best described as “trying to hit a moving target”. Taking a simple approach such as a multiple of your income or just enough to cover your debts could leave your family financially vulnerable if you weren’t around to provide for them. So what method should you use?
Factors to Consider
Income Replacement: The main goal of life insurance coverage is to replace your lost income if you pass away unexpectedly. The first step is to determine how much annual income is needed to provide for your beneficiaries. In most cases, it can be the amount currently earned but that could be adjusted if needed. If your surviving spouse does not currently work but plans on working if you pass away, you can take their potential earnings into consideration when determining needs.
How Long Until Retirement: This will determine how many years you will have to replace income. For instance, if you are 40 and plan on retiring at 65, you would need to replace 25 years of income. In most cases, this number will be used to determine the length of your policy if you choose term insurance.
Other Debts: On top of replacing your income, you might want to take into consideration current debts as well. For instance, you might want to provide coverage that will pay your funeral expenses, mortgage, children’s college fund and other personal debts, giving your family a clean slate to work with.
Savings, Investments and Other Life Insurance – You should take into consideration all funds that will be accessible to beneficiaries at your death like savings and investments. You might consider adding retirement funds like an IRA or 401K when considering your assets, but you should understand that there might be penalties and tax implications if your beneficiaries tap into these funds early. You should also consider any other life insurance coverage you might already have in force.
After Tax Yield and Inflation Rate: These factors are important because the death benefit proceeds will be invested after your death and used to pay your beneficiaries the planned annual income replacement amount. What percentage can they expect to yield after taxes from investments? What will be the expected inflation rate? These factors will impact how much death benefit you will need today to make sure that your family has enough money for the future. After tax yield is viewed as the expected return on investments minus taxes. For instance, if you earn 7% on investments and you are in a 25% tax bracket, the after tax yield would be 5.25% (7% X (1-.25)). The average annual inflation rate for the last 20 years has been about 2.5% according to the website USinflationcalculator.com. Make sure you choose realistic numbers for after tax yield and inflation rate as these numbers will have an important impact on the final amount of insurance needed. For instance, if you overestimate the after tax yield rate and underestimate the inflation rate, you could end up underinsured.
Calculating the Results
The good news is that there are plenty of life insurance calculators out there that will do all of the calculations for you. We just wanted to give you an idea of which factors you should consider when conducting a needs analysis. A very thorough life insurance calculator can be found at the link below titled “Calculate Your Needs”. It will take into account all of the factors above and you can even get an itemized PDF of the results. Once you’ve found out how much life insurance you need, you can then start shopping for the best policy. You should use an independent agent that can shop multiple carriers to find you the best value.
Calculate Your Needs
Financial Underwriting Guidelines
One thing to note is that insurance companies limit the amount of life insurance that you can get based on your age and income. They want to make sure that you are applying for a reasonable amount of coverage compared to your needs. The guideline is usually based on age and income. For instance, if you are 35 years old and make $50,000 per year, you might get capped at 30x your income or $1.5 million of coverage. An insurance company might consider a higher amount if you can justify why it is needed.
Conclusion
When determining how much life insurance you need, take a thorough approach by using all of the aforementioned factors and plugging them into the calculator provided at the link above. Again, it is not an exact science, but proper analysis of your needs will ensure that your loved ones will be properly protected if you pass away unexpectedly. We would be happy to not only help you assess your life insurance needs but also shop your coverage as well. We have access to over 40 insurance companies and will use all of our resources to get you the best coverage option available. Please feel free to give us a call at (888) 687-9444 or email us at info@archstoneagency.com if you have any questions.
Archstone Insurance Services, LLC is an independent agency that shops over 40 of the top life insurance carriers to provide huge savings on life insurance coverage for our clients. We are happy to answer any questions you might have about any of the insurance products we offer, your planning needs or your existing coverage. Feel free to call us directly at (888) 687-9444 or email us at info@archstoneagency.com. You can also visit our website at www.archstoneinsurance.com.
