Calculating how Much Term Life Insurance Coverage You Should Carry
Figuring out how much term life insurance you and your family actually should have can be a daunting task. However, it isn’t as hard as you’d think. The first step is to determine whether or not you need a term life insurance policy in the first place, and then from there calculating how much of it you actually need. Term life insurance is a great way to go when it comes to protecting your family. Not only is it inexpensive compared to other policies, but also it is very easy to understand and therefore get the right amount of coverage for your family. A huge part in choosing a term life insurance policy is figuring out exactly how much money those that depend on you require to live comfortably without you. Additionally, you must decide the right duration for your term life insurance policy in order to give your family maximum coverage when they need it, and avoid over spending when they don’t.
Determine Your Financial Commitment
Your financial commitment includes such things as your college expenses, mortgage, credit card debt and other substantial items that you must pay for in your future. An article from Bank Rate pointed out that the most important time to carry a term life insurance policy is when your debts are being paid. For instance if you know your house will be paid for in the next ten years then you may not need a twenty year life insurance policy. Although having a longer life insurance policy won’t necessarily harm you, you should ensure that you have a good reason for keeping one.
You must keep in mind that the longer your term life insurance coverage is, the more expensive your annual premiums will be. If you’ve calculated a dollar amount of the term life insurance coverage you need, but are unable to afford taking out that large of a policy for ten years then another option is to purchase a shorter term and hope that you can qualify and afford a longer-term policy once the first policy’s term has finished. For instance, if you want a $400,000 term policy, but are unable to afford that amount for 20 years than you can always purchase a 10-year policy, and bank on the fact that you’ll be in a better financial situation down the road.
Out of Your Pocket
It’s also important to look at the amount of money that is leaving your household. For instance looking at the amount of debt that you have other than that for your mortgage is crucial when determining the length of your term life insurance policy. It’s also recommended that you keep in mind whether or not you’re paying down your debt each month or contributing to it. The more debt that you have, the more coverage you’ll need in order to pay it off. You must also think about how much money you’re spending every month. You won’t be able to protect your loved ones if you have no idea how much you need each month.
Look at Your Saving Goals
How much money do you put away each month? If you are able to put money into your savings account every month, and still live within your means then you are on the right path. If this is the case then chances are you won’t have to replace your entire income with a term life insurance policy, and so you’ll need a smaller policy. You should also look at your long-term saving goals. For instance, how much do you need in order to retire? Are you saving enough money in order to pay for your future purchases such as your children’s education? If you have money saved up for expected expenses in the future then you may be set, otherwise you’ll likely require more insurance coverage.
How Much Money Does Your Family Require?
If you pass away how much money will your surviving family members require to live on? This is the most important factor in determining the amount of term life insurance you need. In order to calculate this you must look at the above factors. Adding up how much your family spends in order to pay your bills and taxes, as well as your future purchases is the first step. Once this is done you’ll be able to figure out the age that you’ll be when your Social Security benefit, as well as your investment income will be larger than your earned income. This will be the age that you retire, and so up until that age, you’ll need to replace your income with a term life insurance policy.
Replacing Your Income
You need enough term life insurance in order to replace your earned income. For example, if you make $50,000 a year, you’ll need enough term life insurance so that if you die prematurely, your family will be able to invest the term life insurance proceeds and earn $50,000 a year after taxes. So how do you calculate this? If you earn 4% on the money than all you have to do is divide $50,000 by 4% and you’ll come out to 1,250,000, which is the amount of savings you require in order to invest 4% in order to earn $50,000. Keep in mind that you won’t be able to use any other source of money in order to offset this amount.
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