How much life insurance is needed?
Sometimes people buy life insurance before performing a financial needs analysis. They might choose an amount that seems comfortable, without considering the potential expenses their families might face in the event of their untimely death. To make an objective assessment of the possible economic consequences, perform a financial needs analysis.
In fact, to analyze your own financial needs, consider the following simple steps: First, total the value of all the things that you and/or your spouse own. These are your assets. (Enter amounts in one column for yourself and in another column for your spouse.) When totaling your assets, include what you currently have in savings and retirement funds (such as IRAs, 401(k) plans, annuities, etc.), as well as real estate and life insurance. Next, list and evaluate all expenses that you or your family may face, if one spouse were to die. These are your potential liabilities.
In order to determine how much cash is needed following the death of a spouse, take a look at these potential needs and assign a dollar amount to each:
1. Immediate Money Fund. This includes the estimated cost of medical and hospital expenses, outstanding bills, burial costs, and attorney/executor fees.
2. Debt Liquidation. Your debt, if any, may be in the form of credit card bills, school and auto loans, unpaid notes, outstanding bills, etc.
3. Emergency Fund. Unexpected bills not readily payable from current income could include major home and car repairs, or even medical emergencies.
4. Mortgage/Rent Payment Fund. How much would you need to pay off your mortgage or provide for house payments or apartment rent should one spouse die?
5. Child/Home Care Fund. Expenses may arise following the death of a stay-at-home spouse. Estimate the cost of hiring help to take over your spouse’s duties, such as child care, shopping, food preparation, laundry, and yard care.
6. Education Fund. Be sure to include the cost of funding a four-year undergraduate education or comparable vocational training for your children.
The total of all of the above costs minus your liquid assets and life insurance would give you your new cash needs. The numbers will be different for you and for your spouse, because assets and existing life insurance, as well as child/home care amounts, are likely to be different.
The steps above are one way for a family to figure out how much life insurance is needed according to their circumstances. Analyzing your financial needs in detail is an important step toward determining the right coverage for you and your family.
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