HOW MUCH LIFE INSURANCE DO YOU NEED?

INTRODUCING OUR EXPENSES CHECKLIST

You might think you’ve thought of all the expenses, but don’t bet your life insurance on it.

Life insurance is a complicated beast. Such is the nature of a resource that is designed specifically to provide posthumous financial aid to an individual’s surviving loved ones, accounting for oftentimes decades of potential expenses along the way. The future is impossible to predict, but life insurance asks that you do your very best to anticipate your family’s every need.

No matter how much you’ve considered your life insurance needs, chances are that you have still let a crucial detail or two slip through the cracks, potentially leaving a significant hole in your life insurance coverage.

To guide you in shaping your coverage, we’ve compiled a checklist of some common expenses that your family will need covered now and in the future.

IMMEDIATE NEEDS

Even families that put much effort into planning their future can overlook the immediate financial needs that follow the death of a loved one. When the insured passes away, the death benefit kicks in soon thereafter, but before it can be allocated toward everyday expenses, the lingering matter of his or her final financial needs takes precedence. For many, this may merely include the cost of funeral expenses—burial and the like—which alone can amount to at least several thousand dollars. However, it may also extend to any outstanding medical bills, especially if the deceased was facing a serious medical condition in the end. Then there’s all the personal debt and other expenses. These would include credit card bills, mortgage loans, and student loan debts, many of which simply pass down to the next of kin (likely also the life insurance beneficiary) at the time of death. Sure, your death benefit is intended to span your entire lifetime, but be sure it accounts for immediate expenses as well.

ANNUAL INCOME

Of course, one of the principal purposes of your life insurance policy is to compensate for any loss of annual wages that you currently contribute to your household and ensure that your family is provided for. In many cases, you may be sole breadwinner for your family, or you might share this load with a spouse or significant other who could be thrust into financial strife without your assistance. To maintain your family’s standard of living and ensure their financial security, you need to scale your life insurance coverage to match your annual income. Naturally, doing this accurately means accounting for years of unpaid wages in advance. If you cannot purchase enough coverage to match this total, at least adjust your insurance to match your desired annual income needs. Lost wages may not be an expense in the traditional sense of the word, but neglecting to factor it in will certainly cost you sooner rather than later.

CURRENT ASSETS

Depending on your financial stability, your family might be facing a financial future entirely reliant on your life insurance coverage. This certainly won’t be the case for all though, and depending on the premium rates you’re able to qualify for, you might wish to account for your other assets. If you have investments and other benefits at your disposal, then your expenses, by definition, would be at least somewhat reduced.

By calculating the planned return of your asset portfolio, you may be able to save yourself the heartache of having to unnecessarily invest too much money in your life insurance policy. Sometimes, pumping too much money into your plan can itself be an overwhelming expense. So be sure that you don’t buy so much insurance that it begins to threaten your long-term livelihood.

LONG-TERM EXPENSES

Based on your stage of life (and that of your family members), you will need to plan out your insurance coverage accordingly. Especially if you have a whole life insurance policy, you need to account for not only your family’s lifestyle and survival—including, of course, necessities like housing, food, clothing, etc.—but also anticipate any curveballs the future will surely send your way. Coming up with an annual long-term expense figure isn’t a bad start.

As you determine this number, don’t forget to consider the rate of inflation, which typically sits at 3% but may fluctuate higher in the years to come. In addition, if you have children, include education, mortgage, and other expenses that you would otherwise have provided for them, allowing you to ensure that they have little to nothing to worry about financially in your absence. Without the benefit of clairvoyance, you might not be able to pinpoint their future needs with 100% accuracy, but you can at least invest enough to cover the inevitable expenses that will arise.

This article was written by Robert Yaniz Jr.