How much life insurance do I need?
Term Life Insurance Term insurance is like leasing a car. You purchase the coverage for a specified period -- usually 5, 10 or 20 years. When the period is over, it's like turning in the leased car: the deal is done and you walk away. Term insurance pays a specific lump sum to your designated beneficiary only if you should die during the term of the policy. Often at the end of the coverage term, you can convert a term policy into a permanent policy, but it can be at significant cost.
Permanent Life Insurance Permanent Life Insurance is like buying a car. As long as you pay the premiums, the insurance stays in force as long as you live. It pays a lump sum death benefit to your designated beneficiary upon your death. In addition, if it is a "cash-value" policy, a portion of your premiums may be deposited into a tax-deferred account that you can borrow against while you are alive. Whole Life Insurance, Universal Life Insurance and Variable-Universal Life Insurance are examples of permanent life insurance.
You can group the financial responsibilities you have at the time of your death into three categories: final expenses, income loss, and debts.
Final ExpensesThe costs of funerals are always on the rise and even if you decide not to have a funeral at the time of your death, you still need to consider the costs of disposing of your body. It's a good idea to get a solid estimate of how much your funeral or disposition costs will be by speaking with one of your local professionals. Be sure to write your funeral intentions in a will, so your beneficiaries will know how much of your life insurance money is planned for the funeral.
Also included in your final expenses are federal and state death taxes and property taxes. These are payable immediately after your death and are based on the value of your estate. These taxes average around 10 to 15 percent of your estate, but can vary greatly. Consult an estate attorney for an estimate on your particular expenses.
Income LossHow much income will your family be without when you die? This is perhaps the most overlooked cost when considering the financial responsibilities at the time of your death. When determining this amount, the most important step is communicating with your partner. Talk about whether your spouse will be gainfully employed after you die, how many years before your children's education will be completed, and things such as how your car or house payments will be taken care of.
Once you get a rough idea of how much money per year after your death your family will need, then determine for how many years that amount of money will be needed. Multiply these two figures, factor in a reasonable interest rate for inflation, and you've arrived at the amount of income your beneficiary will have lost after your death.
DebtsAnother consideration is the amount of debt that you will have at the time of your death. When you die, your family will become responsible for those obligations. Add up all your credit card accounts, short-term loans, and installment payments as a factor for determining the amount of insurance coverage. You may choose to include other loans, like car and mortgage payments. Including these as a debt that you want paid off at the time of your death may increase the amount of coverage you need substantially, but your family wouldn't inherit the long-term hassle and expense of those monthly payments.
