Does anyone in your life depend on you financially?
If you answered yes, then YES, you do need a life insurance policy.
It can be hard to pinpoint the exact amount you will need, but with some simple math, you can get a sound estimate to ensure that your loved ones are taken care of.
Simplest Calculation
Take your salary and multiply by twelve. This is the most simplistic calculation and may work in your situation, but it may be worth the extra effort to take the whole picture into consideration.
Financial Obligations
Start with adding up all your outstanding debts. If you die with any outstanding debt, your loved ones could be responsible for all or part of the debt if they co-signed the loan. If your spouse co-signed the mortgage or your child co-signed financial aid, then they would be responsible for the debt upon your death. They would not be responsible for any debt they have not co-signed.
You want to leave enough for your loved ones to continue paying on your debts, especially if they are being secured by collateral, like a home or car. Creditors may be able to seize items used as collateral to recoup debt payments.
Dependents
If you have depends, like children or caring for aging parents, you may need to consider adding about $200,000 to your policy.
College
College has become one of the largest expenses of adult life, but it can also give your child a boost in career and future earnings. Most financial analysts consider $100,000 per child is a safe estimate to put away to cover in-state college expenses. You may consider adding this amount per child into your life insurance policy.
Funeral Expenses
The average funeral costs between $7,000 and $10,000. Most policyholders consider adding this cost into their life insurance policy.
Age and Health Status
This will help you determine how much and how long you will need a policy. When you are young and healthy, you can get much lower rates. If you are older or sick, you may be closer to death and the insurance company will raise their rates in consideration of these factors.
Your total life insurance needs will change as you age. When you are younger, you may have more financial obligations and dependents vs when you are older, you usually have less financial obligations and your dependents are grown and out of the house.
Assets
Consider your liquid assets. A liquid asset is anything that can quickly be converted to cash without losing value. Your checking and savings, money market accounts, certificate of deposit (without early withdrawal penalty), and savings bonds.
Term or Permanent Life?
A term life policy lasts a set number of years and then it expires. Term life policies are usually taken out for 10-30 years and are the most affordable options. A permanent life policy lasts as long as you pay the premiums but can cost six to ten times more than a term life policy.
“Life insurance has one job: It replaces your income when you die.”Dave Ramsey
Affordability
Insurance carriers take your age, medical history, which usually means a medical exam, your lifestyle, and driving record into their calculations. The amount of the policy and length of the policy will also change the premiums calculated.
So, how much insurance do I need?
First, what is your income after taxes? You will need to consider replacing your income for say the next five years.
Add up your liquid assets (checking, savings, money market, savings bonds, etc.)
Add up your debts (outstanding mortgage, loans, credit cards, etc.)
Add up your future financial obligations (cost of college, cost of raising a child, cost of replacing income, cost of funeral expenses)
Calculations
Let’s take an average Texas family, married with two children age five and eight years old. You report to earn $50,000 per year after taxes and have $20,000 in savings (liquid asset).
5 years of replacement income (5 x $50,000) = $250,000
Your Expenses + Debt – Liquid Assets = Amount of Life Insurance
Dependents: The USDA calculates it will cost about $14,000 per year to raise a child until the age of 18. So, in our example, we have a five year old: $14,000 x 13 years (until 18 years old) = $182,000. We also have an eight year old: $14,000 x 10 years = $140,000. Adding college expenses for two children @ $200,000 (in-state college). The total dependent costs are $182,000 + $140,000 + $200,000 = $522,000
Outstanding Debts: You report you have a mortgage balance that is co-signed by your spouse in the amount of $160,000, a vehicle loan for $38,000, and credit card debt $5,000. Your total outstanding debt is $203,000.
Finally, add up all your financial obligations then subtract your liquid assets to = your total policy needs.
$250,000 (income replacement) + $522,000 (dependents) + $203,000 (outstanding debts) – $20,000 (liquid assets) = $955,000* this is how much life insurance you will need for your family.
Overwhelmed … not to worry. At Bennie Camp Insurance, we can easily calculate what you need and will shop all the top insurers to make sure you get the policy you need at a price you can afford. Call us at 979.764.5955!