How Much Life Insurance Should You Have?
Like many people, you may be unsure as to how much life insurance you should carry. If you are underinsured, your family could face financial hardship in the event of your death. If you carry too much insurance, you may be wasting money on coverage you do not need. By using a calculator such as the one found at the msn.com link in References, you will be able to determine the right amount of coverage needed for you and your family.
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Final Expenses
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You first need to determine the amount of your final expenses at death. These will include the cost of a funeral, which can vary greatly depending on the type of casket or if cremation is selected. Other expenses such as transportation costs for out of town relatives attending the funeral can also be included. Allowances for federal estate taxes should also be made, which can range from 37 percent to 55 percent as of 2009. Consult a tax attorney or accountant for more information on estimating estate taxes.
One-Time Expenses
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To relieve some of the financial burden on your family, you should also plan for one-time expenses. These can include paying off the mortgage, paying off outstanding debt such as car loans or credit card bills, and providing an education fund for your children, if applicable. You can also provide an emergency fund, which should range from three to six months of your income.
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Living Expenses
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You will need to determine your family's living expenses after your death. These would be diminished somewhat upon your death. Additionally, you will need to take into account your spouse's projected income as well as any benefits received from Social Security. An estimate of Social Security benefits can be obtained at the link in Resources.
Income Shortage
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It will be necessary to calculate the number of years for which your family will need to make up the difference between your missing income and their living expenses. As a rule of thumb, you should figure on a minimum of three years if you were the primary breadwinner in your household.
Existing Insurance
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Take into account any existing life insurance that you have. This can include insurance coverage carried through your employer, or policies that you have in place to cover existing loans such as life insurance on your mortgage. You can also calculate the value of any assets that your family could sell to raise money in the event of your death.
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