“How much life insurance does my family need?” is one of the top questions our advisors receive when discussing the topic of life insurance with Texas physicians. With a wide range of highly rated policies available on the open market today, each with a myriad of coverage options designed to protect different types of consumers at various stages of life, getting a clear, simple answer to this question can be challenging.
Determining what your family’s specific coverage needs are, and choosing the correct type of coverage and amount to meet those requirements, is perhaps the most important and most challenging aspect of the entire process. Let us take an in-depth look at how to gauge the policy amount you need depending on your household responsibilities, income, and more.
4 Tips for Determining Your Life Insurance Policy Amount
Experts have used the guideline of 5 to 10 times your annual income as a starting point, but there are many other factors to work in to that amount. Here are a few areas to consider when deciding upon your final policy amount:
Assessing Family Needs: Evaluating the needs of your family is your first step to determining the appropriate coverage for a life insurance policy. How much money does it take to smoothly run your household each month? Each year? Also, make a list of current debts such as unpaid medical bills, outstanding credit cards and mortgage balances. Last, add in potential funeral expenses and possible estate taxes. A life insurance policy can help your family pay any immediate expenses, funeral bills, medical bills, taxes, mortgages, ongoing monthly debts, etc. Adding these amounts together will be one of the largest factors in determining your ideal life insurance policy amount.
Determine Financial Obligations for the Future: When tallying up your amount, factor in additional resources to pay any future financial requirements your family may have. This can include college tuition, college living expenses, even setting aside money for your children’s wedding. The idea is to outline the cash flow needs of your family, as well as any financial goals. Add this amount to the approximation you gathered in number one above.
Current Resources: Look at your current resources and the money available today, if it was suddenly needed. How much does your spouse earn annually? What are the balances in your bank accounts, 401(k)s, IRAs, college tuition saving plans, emergency funds, and other life insurance policies (if applicable)? The difference between what you currently have available and what your family will need to survive will help you determine the amount of life insurance you need.
Extras to Consider: Life insurance policy pay-outs can provide a reliable source of income for your family. Also, consider your family’s way of life and factor in enough money for them to sustain their current living conditions when choosing your policy. A well-chosen policy may help them live comfortably for the rest of their lives, or at least until they have adjusted to their new circumstances.
Fewer than half of Americans up to age 64 have their own life insurance policy in place, leaving many families unprepared should something unexpected happen. Protect your family and your assets through proper financial planning and life insurance.
To learn more and discuss the types of life insurance available to you, feel free to reach out to us. We’ll partner you with an advisor who can answer your questions and provide any additional information for you.