The Right Amount of Life Insurance

Here at PaydayLoansCashAdvance we feel it is vitally important that each of our customers has the financial guidance they need to make the best decisions for personal success. Even if you don’t need a payday loan or a cash advance, we want to be here as an online financial information resource, free of charge! One of the questions that we hear our customers wondering about sometimes is “What is the right amount of life insurance?” The answer, of course, is different for each person. However, you can use some good guidelines to help you determine if you have enough life insurance, and how much more to get if you don’t have enough.

Is There an Ideal Calculation Formula?

There are not really any quick formulas for determining how much life insurance you need to buy because each person’s financial situation is so widely divergent from the next person’s. You may have heard certain formulas like “multiply your salary times seven” or “count how many years you have left until retirement and multiply your salary by that number.” Although either of these may be a perfectly valid amount of life insurance to purchase they are not ideally customized for your individual situation. For example, neither of these figures takes into account the fact that you may have three school age children who will need to have their college educations covered financially.

In fact, neither of these quick formulas even takes into account how much your funeral costs may be — they are rising every day. If you have a great deal of debt, that is another thing that a quick formula does not account for, and that debt definitely has to be paid in full following your death. Essentially, your life and your personal circumstances are unlike the life and circumstances of any other person, so you obviously need an individualized approach to life insurance purchase.

Short Term Expense Calculations

First, short term expenses must be considered. Short term needs include final expenses (including funeral and medical expenses,) debts, and urgent expenses. Compile a figure for final expenses that includes an estimated funeral cost, as well as potential hospital expenses that you may leave behind. Add your approximate debts as they stand at this time to that figure. Finally, add an amount for emergency expenses: This should be at least several months’ worth of living expenses, including all costs. Emergency expenses are hard to define at times because they are unknown at this time, but you’d need to be certain that the money would be more than sufficient to cover housing, transportation, and any type of short term living emergencies. Your numbers need not be exact, and it is always better to err on the side of too much than too little when estimating these numbers.

Long Term Expense Calculations

Now, compile long term expenses. These are easier to estimate because they are, for the most part, a known quantity. This includes your home mortgage and the college education of your children. Naturally you can’t predict exactly where or when your kids will be attending college and it is impossible to know the cost. However, you can estimate cost by using the most recent average college costs for the US per year. As of the 2009/2010 school year, a public school was around $7,100 each year while a private school was around $26,250 each year. This will need to be multiplied by four, and it is also wise to account for inflation. Right now, college costs are rising about 5 percent every year, so you will need to add in approximate costs for inflation at around 5 percent each year, counting every year your child has left until college begins.

Maintenance Expense Calculations

Maintenance expenses are next: These are the expenses that you have day in, day out. For example, food, electric bills, transportation, child care — anything that is a set expense that you have to pay every month. If you and your family consider an expense as a necessity, then the expense should be added to this category. Once you have that figure for one month, multiply it by 12 months and then multiply that by the number of years left until you would reach retirement (or, for how many years you want to keep generating income.) Add all of these numbers together to get a preliminary total and set that figure aside.

Resources and Income Calculations

The income requirements have been calculated, but you need to balance that number with the income numbers. This means you will add up all of your assets: Stocks, bonds, savings accounts, retirement accounts, and potential social security income. If you already have a life insurance policy, even a limited one, through your employer or from another source, the total death benefit for that should be added to this income number. Your amount should not include things like your equity in your home, or your car. These are items your family will need to maintain their lifestyle if you were gone, so selling them is not a feasible way to increase income.

The Final Calculations

Take your first number (the total of your calculated expenses) and subtract the resources number from that. The remaining number is a good approximation of how much life insurance you need to have. This number will change over the years and you may need to recalculate each year, especially if you have had any major life changes that impact your finances.

Your life insurance agent can be a good resource in helping you to determine if the figure you have calculated is sufficient for your insurance needs. If you are unsure, simply ask for advice. It is always best to be as fully prepared as possible so that you can protect your family in the future.

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