Life Insurance Do I Need

You can’t protect your family if you don’t know how much you need every month. Don’t just guess. You might think that $500,000 in term coverage is sufficient. After all, it’s a lot of money. But give it careful thought. You may find that this is not enough.

If you die and your family gets the $500,000, what can they do with it? They might invest it using an income diversity strategy and maybe earn 5%. That amounts to just $25,000, of yearly investment income. So, if you earn $25,000 in salary, a $500,000 term policy is plenty. But if your family depends on more than $25,000 each year, you need more coverage. 3. How much do you save each month? If you put away money every month and live within your means, keep it up. In fact, you probably don’t need to replace all of your income, so you need less term life insurance. 4. What are your longer-term saving goals? How much money do you need to retire and pay for your immediate future? Are you saving enough to fund your future automobile purchase, retirement and education for the kids? If you have funds set up for nonrecurring but expected outlays, fine. Otherwise, you need more coverage. 5. How much income do your survivors need if you aren’t around? This is the only thing that really matters when it comes to determining how much life insurance you need. But to answer this you have to first add up your answers for the above questions. Let’s say you know you spend $6,000 each month to pay all your bills including taxes. You calculate this using a personal budgeting software program so you know you are on target. Let’s also assume that this $6,000 pays for everything including future college education, automobile purchases and retirement. Of the $6,000, you earn $3,500 and your husband earns $2,500. You run a financial plan and figure that by age 65, your maximum Social Security benefit and income from your investments will replace your earned income. That’s when you retire. (Without a financial plan it’s really tough to know how much insurance you need.) After you do this exercise, you know that you need to replace your income until you reach 65. That’s $3,500 per month for you and $2,500 for your husband. Your monthly income is equivalent to $42,000 a year. You need enough term insurance so that if you pass away, you could invest the proceeds and earn $42,000 after tax. How do you calculate that?