One of the biggest decisions when purchasing a life insurance policy is determining the amount of coverage. Policy values obviously affect the premium, but calculating life insurance needs goes beyond cost. It should really take into account your assets, debts, and the financial needs of your heirs. Here’s a quick look at how you might approach this calculation.
1. Determine Net Worth
The first figure to calculate is your net worth. If all of your assets were liquidated to settle your debts, how much would you have left over?
Assets to consider:
- Home Equity
- Retirement Funds
- Stocks and Investments
Debts to include:
- Credit Cards
- Loans (Both Secured & Unsecured)
- Current & Potential Liens
- Taxes & Fees
If your heirs intend to retain any assets (such as the family home), then you may want to exclude those from this calculation. Focus on liquid assets that can be used to support your family’s financial needs.
3. Estimate Family Needs
The next step is to calculate the ongoing monetary needs of your family. If you were no longer around to support them, what would they need to maintain their current quality of life? One approach is to simply replace your income. Use our Income Replacement Calculator for this approach. Another is to estimate expenses, both current and future. This may include:
- Daycare or Educational Expenses
- Extracurricular Activities
- Housing (Rent or Mortgage)
- Food and Utilities
- Clothing and Household Needs
- Home Maintenance & Repair
- Medical Care
Once you have an estimate of monthly or yearly expenses, consider how many years your family will need support. This answer will unique to your personal circumstances. For instance, a surviving spouse who does not currently work may need time to regain experience or skills to re-enter the workforce. Disabled dependents may require long-term care. School aged children may require more support than adult children. Calculating life insurance needs involves evaluating you and your family’s specific financial needs.
After Calculating Life Insurance Needs
Once you know how much life insurance you need, you can request quotes from an insurance agent. Use our Instant Term Life Insurance Quote tool to compare premiums from several different companies. Most people opt for a term life policy because it is the most affordable option. By purchasing a sufficient life insurance policy for your family, you ensure that their needs will be met and that they will receive critical financial support in your absence.