Life Insurance—How Much Is Enough?

Jill Green |

You're probably aware of the importance of having enough life insurance to cover expenses if you were to pass unexpectedly.  If that happened, would your family be taken care of?  Sometimes, a simple benchmark of 10x your salary is sufficient.  A better approach might be a "needs analysis" which looks at your family's most important goals and obligations.  Here are some things to consider when looking at life insurance through a needs analysis.

Mortgage Debt

You may want to consider whether your life insurance proceeds will be sufficient to help pay the remainder of the mortgage on your home. If you are carrying a large mortgage, you may need to increase your life insurance coverage. If you own a second home, you may also want to factor that mortgage into the formula.

College Expenses

Many people want life insurance proceeds to help cover their children’s undergraduate college and possibly graduate school expenses. The amount needed can be roughly calculated by matching the ages of your children with projected college costs adjusted for inflation. Because it may be difficult to project costs that far into the future, it is important to revise this calculation periodically, as your children get closer to college age. When estimating long-term savings goals, it may also be a good idea to be as conservative as possible.

Your Family’s Lifestyle

The amount you may need to help provide for your surviving spouse and dependents will vary according to your age, health, retirement plan benefits, Social Security benefits, and other assets, along with your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but your spouse’s income alone may not be sufficient to cover your family’s current lifestyle. Providing a supplemental fund can help your family maintain its standard of living in the event of your death.

Estate Taxes

Life insurance has long been recognized as a method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. Be sure to consult with us as well as your qualified tax and legal advisors to help determine if this is right for you.

Existing Resources

If your current assets and any other death benefits are sufficient to cover your financial needs and obligations, you may not need additional life insurance for these purposes. However, if they are inadequate, the difference between your total assets and your total needs may be funded with life insurance. You must consider many factors when completing a needs analysis. In addition to the areas already mentioned, ask yourself the following questions:

  • What are your estimated Social Security benefits at retirement?
  • How do you “inflation-proof” your family income so the real purchasing power does not decrease?
  • What is the earning potential of your surviving spouse?
  • How often should you review your needs analysis?
  • How can life insurance help provide resources for your retirement?
  • How do you structure your estate to reduce the impact of estate taxes?
  • Which of your assets are liquid and which would not be reduced by a forced sale?
  • Which of your assets would you want your family to retain for sentimental reasons or for future growth possibilities?

As you evaluate your insurance needs, remember to assess your existing policies. Calculate the additional coverage you may need based on your family’s financial obligations and any other resources, such as retirement benefits and personal savings. Planning now may help to protect your family’s financial future.


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Distributed by Financial Media Exchange.

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