As you work your way through life you will reach many milestones. From getting married to having a baby to buying your first house, these are exciting times in anyone's life. However, as amazing as these moments are, they can also come with some significant financial obligations.
Unfortunately, many of these bills will stick around after you have passed away. As such, you will need to take some steps to ensure that your loved ones aren't left in financial peril after you are gone. That is where life insurance comes in.
Though most people are familiar with life insurance as a concept, many are unsure about how much coverage they actually need. As you might expect, there are a number of factors that go into determining the right number for you so some calculations will be required.
How To Calculate The Amount Of Life Insurance That You Need
Though no two situations will be the same, and each person's risk tolerance will play some role in determining the number that they are happy with, you can follow the following method to get a good ballpark figure for how much insurance you will need.
First, calculate your financial obligations. This means adding up your mortgage balance, credit card debt, future childcare costs, and college fees. Then, account for the income that will be lost if you pass away and add that into the equation too. For example, if you make $50,000 per year and want to replace 10 years worth of income you will need to add an additional $500,000 worth of coverage."
Having calculated your obligations, you can then take away your liquid assets - such as a savings account. These can be applied to things such as funeral costs, childcare, and credit card debt upon your passing so they can reduce the amount you will need to cover.
To continue the example from above, an individual who wants to cover $500,000 worth of future income, has a $200,000 mortgage, $10,000 in credit card debt, and expects to put another $100,000 towards childcare and college costs will have financial obligations of $810,000.
However, that person has $110,000 in liquid assets stashed away in various bank accounts. As such, they can subtract that $110,000 from the $810,000 of coverage they will need. This means that they would need to take out a life insurance policy of around $700,000 to ensure that everything could be paid for.
It is important to remember that calculations such as these should only be used to provide an estimated coverage amount. Your specific needs and preferences may have an impact on your coverage requirements. If you are in any doubt, you should speak to your insurance agent or financial adviser before making any final decisions.