How much life insurance cover is enough for your needs?

There’s such a thing as buying too much insurance or too little. Indeed, just how many lifesavers does your family need to keep them financially afloat in the event of your death? It is best to properly assess your family’s needs to ensure you don’t get (and pay for) too much and your family won’t have to make some sacrifices because of too little insurance.

Although it is quite tempting to simply multiply the annual income by a number, this does not fully provide a clearer financial picture. You see, each family’s needs are unique. This includes your priorities with regards to education and your retirement, the level of savings and debt you have and your income. You also have to take into consideration that inflation may eat a portion of the insurance proceeds.

Also, don’t just buy insurance to cover your debt. Your family has other needs, too! If you only provide for mortgage payments, where will your family get the money for child care, food and for the children’s college education?

Do a Needs Analysis

A needs analysis usually looks into both your needs (in the short and long term) as well as your resources (assets and savings) to determine just how much insurance you need. It is also advisable to review this analysis regularly or if there are changes in your family – such as the additional of a new baby.

Here’s how you can do a needs analysis:

Step 1:

Determine your short term needs or what your family may need in the event of your untimely demise. This will include:

  • Final expenses (hospital bills, funeral and burial expenses)
  • Legal fees (Probate court costs)
  • Estate Taxes
  • Existing loans including credit card debt, your mortgage and car loans
  • Emergency expenses to be set aside for home or car repairs as well as for medical emergencies

Add these up to come up with your short term needs.

Step 2:

Determine your long term financial needs. These include:

  • Your mortgage
  • Your retirement fund (if this is part of what you want included in your life assurance planning)
  • Your children’s education fund. This may be quite difficult to assess. For one, you don’t know which school your child will go to and there is inflation to consider.

Step 3

Determine your family’s daily needs and expenses. This will include:

  • Food and groceries
  • Utilities
  • Clothing
  • Transportation and communication
  • And if you want, you can include travel and entertainment expenses

Get this number and multiply by the number of years you think your family will need this income.

Step 4

Add all the numbers from Steps 2 to 3 up. These are your long term and short term needs.

Step 5

Determine your resources. Compute for the total value of your savings, existing life insurance (i.e. those provided by your employer), bonds, stocks and mutual funds as well as future Social Security benefits.  Make sure these are liquid assets, or assets that can be easily turned into cash. Although your home and car will count as assets, these are not included in the computation as liquidating these assets would also mean a change in the lifestyle of the family.

Step 6

Follow this formula:

Needs – Resources = Insurance you need

To protect your loved ones for less, fill the form on the right to get your life insurance quote.