The best way to determine how much life insurance is needed is to complete a needs analysis worksheet. The basic areas in the needs analysis consist of final expenses, one-time expenses, additional income, and other assets. Making a list of this information can make calculating the required life insurance coverage easy.
It’s common for people to take out life insurance policies only to cover final expenses (get them in the ground). These include funeral expenses (which can cost up to $10,000) and any probate costs and estate taxes. Add these costs up to determine how much the life insurance coverage is needed for final expenses. In general, these policies will be the cheapest and usually set the minimum benchmark required for the policy.
One Time Expenses
One-time expenses are also among the most important needs to cover with life insurance. These include things like the mortgage, loans, debts that could burden the family, and costs of future college educations for the kids. These are usually things that people don’t want to leave hanging when they pass on. It’s a way to ensure the family doesn’t have to move out of the home or go into a financial crisis.
Lost income is another factor many people consider when purchasing life insurance. Think about how long your spouse will need to grieve before he or she can get back into the work force. Does the spouse currently work? If not, how much time will be needed to get the proper training to support the family. Multiply the net income by the number of years needed and add this number to the total above. This is the total amount of insurance needed.
Take Other Assets into Consideration
Don’t forget to take other assets into consideration. Add up the total face value of other insurance policies which could also include ones offered through an employee benefit package. In addition, add any applicable retirement funds, IRA’s, pensions, 401K’s, and other assets. Subtract this number from the total above to see the actual amount of life insurance that is still needed to be purchased. This will allow the required insurance policy to have the most affordable premiums.
Term or Whole Life Policy?
When it comes to the price of the policy, many people will actually choose less coverage in order to afford the premiums. As a result, it is worth noting that those on a budget can still receive the same coverage for a smaller premium with term life insurance. The only downside is that term life insurance expires after a set number of years where whole life insurance will continue for your whole life.
Completing a life insurance need analysis worksheet is an excellent way to determine how much insurance is needed to take care of loved ones. Life insurance is a great way to get peace of mind that loved ones will be taken care of if the unexpected happens.