Determining whether you need life insurance is easy. Unless you’re nearing retirement and have a great deal of personal savings stowed away, your family needs some amount of protection.
However, determining exactly how much insurance to buy can be a complicated affair. While some experts insist that a life insurance policy equal to 10 times your annual income will be adequate to protect your family, your individual calculus may vary according to multiple factors.
In short, you will need more insurance if you are your household’s sole earner, you have younger children that plan on attending college, or you have significant amounts of personal debt that your family will need to pay off upon your death. If you need guidance, use an online life insurance calculator.
Using an Insurance Calculator
You’ll find life insurance calculators on most insurers’ websites, as well as on third-party finance sites, like Bankrate.com. As opposed to quote generators, which request basic numerical information about your age, marital status, health and income, this interactive tool resembles a long-form questionnaire. You’ll be asked to estimate your funeral costs, the future needs of your dependents, and whether you have school-age children who may go to college. When analyzing your responses, insurance calculators assume that the return on your policy’s proceeds will grow as time goes on.
Remember that it is in the financial interest of any life insurance provider to encourage potential customers to purchase generous amounts of coverage. Life insurance calculators can provide clarity about the process of determining how much insurance you’ll need, but don’t be afraid to seek a second opinion.
An Alternate Approach
If you wish to bypass traditional insurance calculators, you can roughly estimate the amount of insurance that you’ll need by lumping your future expenses into four broad categories. These are your funeral costs, outstanding debts, your children’s education expenses and your family’s day-to-day living costs.
Although your exact figures may vary, finding values for each of these categories is a straightforward process. Depending upon where you live, the average cost of a funeral these days runs between $10,000 and $20,000. Your debt load includes current debts like your home and auto loans, credit cards balances, and any student loans remaining from your younger days. Your childrens’ future college expenses may be harder to estimate, but you can make separate calculations for in-state and out-of-state public universities as well as more expensive private schools.
Finally, divide your yearly income by two to determine what your family will need to get by without you. If you worry about your spouse’s ability to find work and support your children at the same time, increase this figure accordingly.