Identifying your Life Insurance
Needs
If anyone depends on your income, one way to determine the amount of life
insurance you need is to multiply your annual gross income by a specified
number.
For example, according to the American Council of Life Insurers (ACLI) guide,
What you should know about buying life insurance, one rule of thumb is that
you need life insurance coverage equal to ten times your annual gross income.
But as the ACLI cautions, this shortcut method may over or underestimate your
actual needs. So take the time to consider in more detail how much your family
would need for expenses if you died prematurely. An insurance representative,
software program, or
online
calculator can help you make some estimates.
If you’re part of a couple do a separate calculation for each of you. And if one
of you stays home to care for your children, evaluate whether you need life
insurance to pay for childcare and household services that would have to be
replaced in the event of death.
Here’s what you need to take into account to estimate your specific life
insurance needs:
Expenses
-
Your
survivors’ immediate expenses, including final unreimbursed medical bills,
funeral costs, probate costs, and any federal estate and state inheritance
taxes.
-
Your
outstanding debts, including any vehicle loans, credit card balances,
home-equity loans, and mortgage.
-
Any extra
expenses during your survivors’ readjustment period. For example, if you
have a working spouse who would take some time off and would need extra
funds for living expenses during that transition period.
-
Your family’s
regular living expenses, including food, utility bills, clothing, insurance
premiums, property taxes, emergency funds, and other ongoing costs. If you
think your family’s living expenses would measurably decrease without you,
consider estimating their needs at a percentage of your current expenses,
for example 70% to 80%. The exact amount depends on your family’s specific
situation.
-
Your family’s
future expenses, such as your children’s college education costs and your
spouse’s retirement fund.
Income
-
Assets your
survivors will have available to them, including existing life insurance
policies, savings, investments, and retirement plans.
-
Any income
your survivors can count on, such as a spouse’s salary, and if you’re
eligible, Social Security survivors benefits. In general, Social Security
survivors benefits may be paid to your widow(er) at any age if he or she
cares for your child who is under age 16 or disabled.
-
Benefits may
also be paid to your unmarried children under age 18, or up to age 19 if
they’re in high school. Benefits may also be paid to divorced spouses and
older disabled children under certain circumstances.
-
An estimate
of the survivors benefits your family qualifies for is included in the
statement the Social Security Administration automatically sends you each
year. For more information about Social Security survivors benefits, visit
the Social Security Administration website for the brochure, Survivors
Benefits,
www.ssa.gov.
Article is for educational purposes only and is not intended to
provide specific tax or legal advice. For answers to tax questions, please see
your tax professional. For legal questions, consult an attorney. |
