How much life insurance do I need?
Having life insurance in the event of your passing can mean the difference between your family being able to maintain their standard of living and being forced to sell off property to survive. But how much insurance do you need to keep your children, spouse or other loved ones safe and supported? To make this decision easier, we’re breaking down the factors that go into determining how much life insurance you need.
Calculating Your Life Insurance Needs
If you have children, a spouse or anyone who depends on you financially, you are likely to need life insurance. It’s also a way to settle debts, pay final expenses and leave a significant donation to a charity if you’re so inclined. Because there are so many uses for this money, it’s typically beneficial for most people to carry some kind of life insurance. How much you’ll need will depend on several factors:
Debt: Here, we don’t consider a mortgage to be debt, but you will need to think about credit card debt, loans and any other bills you are unable to pay off on a monthly basis. If you know that you are adding to your debt each month, you will have to purchase a policy that will cover this, not just the debt you have right now.
Monthly Household Expenses: Take an honest look at what you and your family spend each month. Don’t guess at this! Pull out your accounts and see how much you’re spending and where the money is going. Consider how long your policy will need to sustain the household and if there is any income but your own coming into the household.
Yearly Income: Will your spouse or children need your whole income to survive? With careful calculation, investment and planning, your loved ones will not need to change their quality of life after you pass so it’s important to look at this with real numbers. You may not need to have a policy for this exact amount but you will need to have a plan for investing in place.
Example: A million-dollar policy, invested in an income diversity strategy, can earn 5% in interest which will generate $50,000 annually. Is $50,00 enough for your loved ones to survive on? If it is, then this is a good amount. However, since the 5% is not guaranteed and expenses can fluctuate, it may be good to consider even more coverage than this.
Savings: If you’re saving regularly, you may be able to get away with less insurance since there will be additional resources to draw upon and your total income won’t need to be replaced.
To get a more detailed look at what you will need for your own situation, it is best to consult with a financial advisor and knowledgeable insurance agent.
At Arbor Creek Financial LLC, we help to insure a wide range of clients with varying goals for themselves and their loved ones. When you contact us, we will take your concerns, budget and future needs into consideration as we discuss your life insurance options. We are dedicated to providing personalized solutions and sound financial advice to all of our clients. To speak to a knowledgeable and friendly advisor, please call us at 1-866-462-6526.