Ideally, you should have enough life insurance to pay debts,
cover future expenses and provide an income for your survivors.
Often affordability prevents this from happening.
Whether you purchase all the life insurance
you need now or build your coverage over time,
determining how much you need or want is the first step.
Annual Income Objective
Your annual household income
objective is the amount needed
for your survivors to live comfortably.
Since few individuals
want to accept a lower standard
of living, this amount will need
to be carefully considered. In
addition to the usual living
expenses, include any unique
personal expenses — for instance,
financial obligations for
a disabled dependent or elderly
parent. Use the work sheets at
the end of this article to
help you determine your annual
household expenses and life
insurance needed.
Other Sources Of Income
Other sources of income
include your surviving spouse’s
annual income, annual investment
earnings, Social Security
benefits, pension payments and
income from such investments as
rental property.
If you are eligible for Social
Security, your family may receive
survivor benefits. A surviving
spouse (even if divorced) caring
for your children will receive
these benefits until the youngest
child reaches age 16, at which
time the payments to the spouse
will stop until the spouse reaches
age 60. The surviving spouse
without dependent children will
not receive any survivor benefits
until age 60. Surviving children
also qualify for benefits until age
18 or 19 if they are still in high
school.
How much Social Security will
provide to your family depends
on your age at the time of your
death, length of employment,
your career earnings and the
number and ages of your family
members. To help you understand
your benefits, the government
annually mails you a
detailed statement of your Social
Security benefits approximately
3 months before your birthday.
To get current information on
your Social Security benefits,
call the Social Security Administration
at (800) 772-1213 or visit
their Web site www.ssa.gov.
Calculating Expenses
Some expenses will be
immediate, such as those for
funeral costs. Some expenses
are ongoing, such as living costs.
Others are for future needs,
such as a child?s education or household emergencies.
When life insurance
companies compute these future
expenses, they use inflation-adjusted calculations to account
for future costs.
Funeral costs vary. An elaborate
funeral will cost much more
than a simple service or cremation.
You will want to include
the cost of a cemetery plot, transportation,
clergy fees, flowers,
casket and headstone.
The Veterans Administration (VA) can help
reduce funeral costs when
certain requirements are met.
For more information on these benefits visit their Web site at www.va.gov.
If you have full medical insurance,
the cost of your last
hospital stay may be minimal.
Most medical insurance plans
set a maximum amount for
which you are responsible. You
can use that amount as the cost
of your final illness. If you do
not have full medical insurance,
you should add several thousand
dollars to your expenses.
If you leave a will, your assets will be distributed as you wish,
after your will goes through the probate process.
Probate is the legal process of "proving" a will is valid under the law in the
state of your legal residence. Property you leave through a will is subject to probate.
However, some states allow exceptions, so become knowledgeable of your state’s provisions.
Your tax accountant can help you calculate the state and federal tax liability of your estate.
Also, consider any other outstanding debts such as vehicle payments,
education expenses, credit card balances, mortgages or other loans.
Existing Assets/Other Insurance
You may have assets your
surviving spouse could liquidate,
if necessary. These include
savings, securities (unless you
have assumed they will be an
income source) and existing life
insurance. You may also include
the following assets if held by
you (not your survivors): IRA
and Keogh plans, 401(k) plans
or other pension benefits and
lump-sum pensions payable at
death.
Amount Of Death Benefit
Use the work sheets
Assessing Your Life Insurance Needs
and How Much
Life Insurance Do You Need? Work Sheet
to calculate the total amount of life insurance needed.
Not every item on the work
sheets will apply to you. It is
important to be honest in
your self-assessment.
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