How Much Life Insurance Should You Have?

How much life insurance a person should have is an important question that can determine your family’s success or failure should you die unexpectedly. If you have a family that is depending on you then you should take the time to make a few calculations as to what is needed.

The first issue that your loved ones might have to face is the burial. Average burial costs can range from $5,000 to as much as $15,000. In addition to the burial you might have: unpaid medical bills as well as taxes and probate costs (money to process your estate), outstanding debts, mortgage bills, school expenses (college and/or private school).

The real question is; how much income is needed to maintain my household for my dependents in the event that I will not be there to provide?

First look at your current situation. What is your monthly overhead? You should include any outstanding debt, as well as your mortgage, car loans, etc. The more debt you have, the larger the life insurance policy you will need. You will also need to determine regular monthly expenses for your family (food, utility bills, entertainment)

How much money have you been saving? Are your debt free? The more you save now, the more money your family will have in the event of your death. If you have been careful and saving through your whole life, they will have that income available. What are your long term goals? Will you have large future costs such as paying for education for your children? Will you need to replace that old car? Are there any family members that require extra medical expenses?

To help determine how much coverage you will need, imagine you have a $400,000 policy and your family invests this which returns about 4% a month. That’s only about $16,000 per year. If that’s enough, then great, but most likely you will need more.

How much income will my survivors really to maintain their current lifestyle? First you need to know what your current budget is each month and how that income is created. Let’s assume that you make $3000 per month ($36,000 per year income) and your wife makes $1000($12,000 per year income). Your total yearly income combined is equivalent to $48,000. So you would need enough insurance to be able to invest that amount and earn $36,000 per year.

If you earn 4% on your money, then just divide $36,000 by 4% and you will have the amount. For this example, the amount would be $900,000. That’s how much savings you will need to invest at 4% to replace the $36,000 per year. That $900,000 is what your family members will need if they don’t have your income.

What about the decreasing value of the dollar due to inflation? As the value of the dollar changes over time, you might need additional income to offset that. Do you have pensions, 401(k)s, IRAs, 529 college savings plan, social security or investment income that will be maturing? This would need to be included also in your calculations

These are only estimates, but they give you an idea of how important planning can be. Most insurance companies recommend for a family, a life insurance policy of at least $1,000,000.

Do you need still need help finding out how much life insurance to have? NAC Members can speak to a financial advisor by phone to help you answer your questions.
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