How Much Life Insurance Is Enough?
- Your life insurance needs will change as your financial situation changes.
- Life insurance can help cover your family’s immediate financial needs and replace lost income.
What you need to consider
If something were to happen to you, would your family have the funds needed to achieve the goals you have made with them? It’s not a fun topic, but one that’s important and can help your family in a time of need.
Check your life insurance needs as your financial situation changes.
- Growing family
- Education funding
- Career advancement
- Getting married or divorced
- Change in mortgage expenses
As a starting point, the average cost of a funeral in 2014 was more than $7,000.1 There might also be probate fees or other funeral costs.
If your family will keep your home, you will need to figure in the remaining balance of your mortgage, insurance, taxes and maintenance. Even if you think they will eventually move, think about the cost of rent or a new mortgage payment. Remember, selling a home may trigger capital gains taxes. Consult your tax advisor regarding your circumstances.
Think about unexpected emergency costs like income lost due to work absence, medical expenses or home repair.
Next, take a look at your credit card debt, car loans, education loans, and other outstanding liabilities. Think about unexpected emergency costs like income lost due to work absence, medical expenses or home repair.
If your children are going to college, this is another item to set aside for immediate expenses. You’ll also want to figure in the cost of future college education for younger children.
According to College Board research, four years of tuition, books, room, and board is right around $88,000, on average, for a public college and $190,000 for a private school.2
You may also want to replace the income you would have been earning for your family. Take a look at how many years your family will need support and the average rate of return on investments.
Think of your life insurance in terms of the income it can provide.
If your retirement savings can be liquidated, it might provide cash flow for your family. These can include an IRA, 401(k), annuities, and other retirement accounts. If your retirement plan allows, your survivor may receive a single payment of the entire balance (fully taxable to the survivor). The surviving spouse might also have the opportunity to roll over the entire balance into a traditional IRA. Keep in mind there may be additional taxes due when accessing retirement savings.
You’ll also want to figure in the cost of future college education for younger children.
For most families, Social Security provides only temporary benefits. Become familiar with how long your family would be eligible for benefits. The length and the amount of benefits might be so small it is not worth including in your calculations.
Take a close look at what your family could choose to liquidate, including any stocks, bonds, savings accounts, etc. Also consider other assets you own, including inheritance, commodities, and rental property.
If you own rental property or a vacation home, your family might keep it or sell it. If kept, all related expenses will need to be calculated just as with a primary residence, including mortgage payments, insurance, taxes, and maintenance. If sold, there will be selling expenses and taxes due upon sale.
Start your planning
You will want to analyze the potential lost income, expenses and assets for each person in your family to plan for a variety of possibilities.
Your Financial Advisor, tax advisor and attorney can help review your current financial situation and develop a strategy to help protect your family’s financial goals. Note, this is just a starting point for discussion and planning for your life insurance needs.
- Review immediate expenses to get an idea what your family might have to cover.
- Analyze the potential lost income, expenses and assets for your entire family to plan for a variety of possibilities.
- Find out how long your family would be eligible for Social Security benefits.
- Check your life insurance policy to see how it aligns with your estimated expenses.
1 2014 National Funeral Directors Association, http://www.nfda.org/news/statistics.
2 Total yearly costs for in-state tuition, fees, books, and room and board (transportation and miscellaneous expenses not included). Base is 2015-2016 school year. Costs for future years assume a 3.3% national average increase per year for public and 3.5% national average increase per year for private. Source: Trends in College Pricing. ©2015 collegeboard.com, Inc.