The amount of insurance needed by an insurance customer is often confusing for many people. You can follow this general philosophy to find your own target range: financial liabilities minus liquid assets.
Calculate obligations: Add your annual salary (multiplied by the number of years you want to represent as your income) + your mortgage balance + your other debt + future needs such as tuition and funeral expenses. If you are a parent living at home, include fees to correspond the services you provide, such as child care.
From that, reduce liquid assets such as: savings + existing college funds + life insurance at this time.
Tips to keep in mind
Remember these tips when you calculate your coverage needs:
Instead of planning life insurance separately, consider purchasing it as part of an overall financial plan, said certified financial planner Andy Tilp, president of Trillium Valley Financial Planning near Portland, Oregon. The plan must take into account future expenses, such as tuition, and future income or asset growth. "After the information is known, then you can map out life insurance needs above the plan," he said.
Do not skimp. Feldman recommends buying a little more coverage than you think you need instead of buying less. Remember, your income will likely increase over the years, and so will your expenses.
Even though you cannot anticipate exactly how much is the increase, having insurance will help ensure maintaining the lifestyle of your partner and children.
Discuss the numbers with your partner, Feldman advised. How much money do you think your partner needs when he has to live without you? Do your estimates make sense to him? For example, does your family need to engage your full income into an insurance plan, or only a portion of it?
Consider buying more than one smaller life insurance policies, rather than buying one big policy, to vary your coverage according to your needs."This can reduce total costs, while ensuring adequate coverage to the time needed," Tilp said. For example, you can buy a 30-year policy to protect your spouse until your retirement and a 20-year policy to protect your children until they graduate from college. Compare life insurance price quotes to estimate costs.
Turner recommends parents of young children to choose a period of 30 years versus 20 years to give them plenty of time to build assets. With a longer period of time, you can do a lot of income-generating activities and you'll have ample time to shop for more cover and have higher tariffs when you are older.