When shopping for life insurance, the number of years for which you want to have coverage and the amount you’re willing to pay for it are both critical numbers to consider. So how do you determine how much life insurance you need?
There is no exact science to figuring out how much life insurance you will need, but there is a way of arriving at a calculated estimate that helps you purchase the right amount for your needs.
You may have a small term life insurance policy through your employer, or maybe you purchased a modest policy years ago that is now outdated for your needs. Begin with this number as your jumping off point.
For example, let’s say you have a $50,000 policy as part of your employee benefits.
Take the amount of money you have in savings, investments, home equity and any other assets and add it to the amount of life insurance you already have.
Let’s say you have $10,000 in savings, $15,000 in home equity and $20,000 in stocks. Add those figures to your $50,000 in existing life insurance, and you have $95,000 in life insurance that you don’t need. In other words, if you were to die unexpectedly, your surviving beneficiaries would have $95,000 worth of assets available to them.
If you were to die, how many years of your income would you like to make available to your beneficiaries? In other words, how much time would you like to “buy” your dependent family members before they must provide for themselves financially?
If you want to supply your beneficiaries with 10 years of income and you make $50,000 per year, that puts you at $500,000 (not adjusted for inflation or possible salary raises or bonuses).
Taking that $500,000 and subtracting the $95,000 in assets that you already have puts your projected coverage needs at $405,000.
If you have children that you wish to send to college, you may want to account for those costs in your life insurance needs.
Let’s say you have one child and wish for them to attend college. Given the rapid increase of college tuition, estimating how much you’ll need to set aside can be tricky, but $130,000 is a safe number to use as a guide. (Be sure to account for any existing college funds you have and work those into your coverage needs total).
Adding that $130,000 to your total now brings you to $535,000 of life insurance coverage needs.
A funeral can easily cost around $7,000 or more. You may not want to leave your grieving family members feeling financially pinched to cover your final expenses, so you may want to work that into your life insurance coverage.
Your final expenses now bring your total amount of life insurance coverage needs to $545,000.
Find out how much you have remaining on your mortgage balance and add that into your total number.
One thing to note is that if you’ve factored any of your salary into your life insurance total, you likely already accounted for some of your mortgage payments. If you have a fixed rate mortgage with 10 years of payments remaining and you’ve included 10 years of salary payments in your life insurance total, you may not have to leave any additional money to cover the mortgage.
For our example, let’s say you have 15 years of mortgage payments remaining. We’ve already built in 10 years of income replacement, so you’ll only have to account for five years of mortgage payments to cover the difference. At a fixed rate of $1,500 per month, those five years add up to $90,000, bringing your new total of life insurance coverage needs to $635,000.
You’re now at a pretty close approximation of how much life insurance you should consider buying. Before finalizing your number, consider the following “extras” to add on as necessary:
At AIG Life Insurance Companies, we make it easy for individuals like you to determine how much life insurance you may need. Use our online life insurance calculator to plug in your numbers and view a detailed breakdown of your needs. Call 1-800-390-3019 to speak to an AIG-appointed insurance agent to help you determine how much life insurance coverage you need.
Policies issued by American General Life Insurance Company (AGL). Issuing company AGL is responsible for financial obligations of insurance products and is a member of American International Group, Inc. (AIG). Products may not be available in all states and product features may vary by state. ©2018. All rights reserved.