A very commonly and frequently asked question in finance sector is, “how much life insurance do I need?” The question is a genuine one which troubles almost all of us at some point in time. It is very difficult to think about things and conditions after one’s death and this adds even more complexity to this question. The amount of insurance you really need, in the end, depends on various factors. The first factor is the kind of lifestyle you lead right now. Your current lifestyle will decide how much money you should be investing in your insurance as well as how your family will live after you die. However, other factors can also weigh in as we progress.
The next question you could address is, “how do you want your family to live after your death?”. Some people want their family to be very rich in case of their demise and don’t want them to be getting in any type of debts later. Some would prefer their partner keep working after their death and save accordingly. Some may even consider that their family wouldn’t need any insurance money after their death while others would like their family to pay off their debts using the insurance money. Therefore, the real answer to this question lies with you, how you live and how you want your family to live after you are no longer there for them.
When it comes to life insurance and knowing the proper amount, you need to know all of the assets you have available to you. Are you currently getting monthly payments from a structured settlement (click here for more information) from an accident or lawsuit settlement?
In this post, we will discuss two real life situations that you might face. The analysis of these situations will allow you to decide the amount you need for your life insurance and how you can get started with it.
Situation 1: Your partner earns enough to support the family with his / her income or you don’t have any other members in the family
The first situation suggests that your partner earns enough and contributes substantially, if not equally, to the total household income. The situation also puts forth the idea that you are your partner are the only two members of your family and have no children to support. In such situations, you may actually like your life insurance to pay other expenses such as your debts which will relieve your partner of the burden when you cannot support their payment.
It is very common for young couples where both partners are successful in their work life to invest in a life insurance plan which allows them to pay off their debts after the death of one of them. When there are no kids in the picture, such a decision can be made very easily. To calculate just how much money you need, you don’t have to do much but simply add the amounts of debts that need to be paid. For instance, if you have to pay your house mortgage and car loan, just add the money which needs to be paid. This is the amount you should be aiming for when applying for a life insurance.
However, there is something wrong with this approach. The amount which you owe right now will not be the same as you owe in the next few years. However, since there is nothing you can do about it and there is no way to predict your death, you should simply go with this approach. If you end up paying off your debts before your death (or if the amount seems to be almost paid), you can simply cancel your life insurance.
To conclude, life insurance needs are unpredictable and you can never exactly deduce the amount which your family would need. This is why it is important that you pick a reasonable and decent amount which can help your family in worst case scenarios.
Situation 2: Your partner will not be able to support the rest of the family with just his / her income
The second situation is a lot more complicated and also very common when it comes to life insurance problems. Here, you need to make numerous assumptions about the future. Are your kids going to need money for their education? How will your partner pay off the debts you both are currently in after you die?
To find the right answer here, you will have to look at this situation in two parts. In the first part, you will consider the debts which need to be paid. Your insurance should cover this amount in full so your partner can easily pay it off after you die. The second part is providing your family with a reasonable annual income. If your family withdraws 4 per cent of the insurance money each year, they should have 25 times the annual amount in their account after your death. Add these two sums and you will get the final insurance amount which you need to provide for your family.
Also, you could weigh in other factors as well when getting to the final sum. These include inflation and the 10-year income gap. Also, 4 per cent might actually sound like a much less amount which your family may need in future and considering 5 or 6 per cent sounds better and more secure.
The above situations are common and clear a lot of doubts about picking the right amount of money for your life insurance but there are more things you should consider. These are your retirement savings and pensions. If a couple is in their 50s and one of them dies, the survivor would only need insurance money till they turn 60. After 60, they can live off the retirement funds. Also, for older people, pensions are another source of income so if a pension is not so far in the future, factor it into the decision making process as well.