Calculating How Much Life Insurance You Need (1255)

"Insurance poor" may describe your family’s condition if you don’t tailor your insurance to your family's needs.

Insuring your family’s future if you die requires a mix of careful planning and guesswork. Some families may be paying for more insurance than they need, but many Americans are under-insured.

Life insurance is often sold not bought. A family may simply buy a policy suggested by an agent rather than identifying a family’s needs and seeking the policy that best suits them.

The primary purpose of life insurance is to protect your dependents from economic hardship if you die. So, the right amount of insurance varies with your dependent’s needs. If you are single you may need no insurance, or only a small policy to cover funeral costs and other final expenses. But if you support your parents or other family members, you may need a larger policy. Even if you are married, you still need only a little insurance, as long as you do not have dependent children. Your needs will depend upon whether or not your spouse is financially independent.

But the breadwinner with small children almost certainly will need life insurance. A homemaker also may want to carry insurance, for if she dies, her family may incur substantial costs for child care and other household services she provided.

To determine how much insurance you should carry, estimate the expenses your family will face if you die and then subtract survivor’s benefits, pensions and other assets. To calculate your family's needs, first list all final expenses such as taxes, probate costs, funeral costs and unpaid medical bills your family may incur. Add to this an estimate of household expense, minus expected Social Security payments and other benefits your survivors would receive regularly. This figure, adjusted for inflation, should represent the additional income your family would need each year to maintain its level of living.

Also, list money you may want to contribute toward your children’s education and your spouse’s retirement, in addition to Social Security benefits they could collect.

Now subtract your assets. These include your current insurance, lump sum pensions, cash, savings, real estate equity, securities and other resources.

The remainder represents the insurance coverage you need. It is a good idea to assess your insurance needs regularly to make sure that the policy you carry adequately protects your family or that you are not carrying more than you need.

While there are many types of life insurance products available, term policies generally provide the most insurance protection for the lowest cost. Be sure to compare the cost and coverage provided for the policies you are considering.

For more information on this subject, Please visit the College of Agricultural Sciences Publications Web site.

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