How much life insurance is enough?
September is Life Insurance Awareness Month—a good time to take a fresh look at your existing policy, or consider how much coverage to get on a new policy.
Purchasing a life insurance policy is an important step toward protecting your loved ones from financial uncertainties. There’s no way to say accurately how much money your family will need to replace the financial support you provide in the event of your death. But it’s smart to think carefully about the future expenses they may require, and ensure the death benefit on your life policy is sufficient to cover these financial needs.
Calculate a ballpark amount. One common rule-of-thumb for determining a death benefit amount is to take 10 times your annual salary. This factor may provide not enough of a death benefit for some people and too much for others. Feel free to adjust this factor based on your existing financial resources and how much premium you want to pay.
For a more precise estimate. You can get more exact with your death benefit estimate by computing your coverage gap—the difference between your liquid assets and your liabilities. First, tally your financial resources, including your after-tax income, value of taxable brokerage and other investment accounts and your cash savings. Next, subtract from this amount your financial obligations, such as your mortgage and other recurring debt you owe.
This number is your coverage gap, or what your death benefit should provide to your spouse and family when they can no longer depend on your income. Keep in mind this is an estimate too, and doesn’t account for any retirement savings you’ve accumulated or additional life insurance coverage you have.
Put a finer point on it. Married couples can expect some financial support from Social Security survivor benefits. However, the earliest these benefits can start is age 60. Younger married couples may consider increasing their policy’s death benefit to provide enough income to the surviving spouse until they reach the age to claim benefits as a widow or widower.
Another consideration many families make when determining life insurance coverage is using death benefits to pay off their home mortgage or to cover higher education expenses for their children. This financial support can provide reassurance to a surviving spouse at an emotionally sensitive time.
Other final expenses to consider: funeral and burial expenses; taxes; and administrative fees for settling an estate. These may be small amounts in the big picture, but covering them with a life policy’s death benefit can relieve some of the financial burden your surviving spouse and family will face.
Thanks for checking out the blog.
Joe Breslin , CFP®