Ok. So, you decided to get life insurance. The number question that comes to your mind is, “How much life insurance do I need?” Simple answer is: “As much as you can afford!” Easy said, but how to achieve that? Now that’s the real question that will examine here below. There are several approaches to calculating the need for life insurance. The first is called the Needs Analysis and the second is Life Value Analysis. Let’s take a look at each one separately.
The Needs Analysis
This is an approach to calculate how much life insurance you need by looking at your “overhead”. In this case a monthly family overhead. In this analysis requires you to review all your expenses. These are variables that differ for everyone. It is virtually impossible to get a good quote without knowing these numbers. Some of these expenses are rent or mortgage, school or childcare, utilities, car payments, food, babysitting, final expenses and maybe a few others that are specific to you.
After you get all these numbers together, you then need to look at how much money you have. Here you will add up your cash and liquid assets. Meaning various stocks, bonds, retirement accounts, term savings accounts, even possible equity in your home. And now you analyze these two numbers. This will tell you how long you will last should one or both household incomes disappear tomorrow. Now comes the part were you decide on how much life insurance you need. How long before you are forced to liquidate your assets.
The Life Value Analysis
The second method looks at your lifetime income. This is done by looking at your age, your current income, number of productive years, possible wage increases. And don’t forget to subtract about 30% in taxes. Putting all these variables into one equation will produce a number. And again, you now have to decide how much of this should insurance cover? Or how much can you afford to cover? It is a simpler method, but the number will surprise you. When you look at the larger picture, you’ll see how valuable you are even in terms of money. Question is, how responsibly can you manage it?
How Much Life Insurance Should You Buy?
The rule of thumb is that in case of the needs analysis, you should look at 20 years. Meaning should something happen to you, your family can keep the same lifestyle without needing to quickly sell the home and so on. This type of protection will give you a piece of mind and it will make you more productive.
For the life value analysis your number, depending on your age, may be higher. Lucky for you, the younger you are, the cheaper the premiums are. Plus, the younger you are, the more flexibility you have. You can utilize term insurance at dirt cheap prices. Just like you see in all the ads. However, you should always take advantage of all benefits life insurance has to offer. This is why your coverage should also include some whole life policy, i.e. permanent coverage.
Next Steps
If you performed any of the analysis above, great. You now have an idea of what your needs are. Let’s now take a look at how much life insurance you can afford. Fill out our form here and let’s start a discussion on how to optimize your coverage. And if you’re not sure about your analysis, don’t worry, we can do it together.