What Are My Life Insurance Needs?

How much life insurance do you need to protect your family's future, should you die prematurely?

When choosing the amount of coverage that's right for you and your family, consider how much your family would need to live comfortably without depleting their existing assets and compromising short-term and long-term plans. Which dependents, if any, would require financial support? When would they need it, how much will they need, and for how long? What income would be available from other sources?

Here are other major factors to consider:

• Other sources of household income (such as a second paycheck).
• Any debts that you want paid off (such as a mortgage, car loan or credit card).
• Any future college expenses.
• Any special needs, such as a handicapped child and your parents who may be financially dependent on you.
• Your non-working spouse, who wouldn't have an income if you died.
• Your working spouse, who may choose, or be required, to "retire" to raise your children if you died. 

The general recommendation is to obtain a minimum of five to ten times your annual salary in life insurance coverage. But this inexact rule of thumb may underestimate or even overestimate your actual insurance needs. A better way to determine your actual life insurance coverage is to assess your resources and expenses, and calculate the amount necessary to cover your responsibilities.

Remember, our life insurance needs will go up and down as our income, investments and responsibilities go up and down. Without children, insurance requirements are not great. However, children and a mortgage mean increased responsibilities and a greater need for insurance protection. As children near college age, insurance needs normally reach a maximum.

At retirement, insurance again may not be a big factor, except for providing the necessary liquidity when it comes to settling your estate. At that point, your investments assets may be sufficient to provide your surviving spouse with the required income.

Since the need for protection changes, we strongly recommend that you evaluate your life insurance every 3 years at the least, and that you buy insurance policies that allow you to change protection coverage.

Death benefits for life insurance are paid out very quickly, and are not taxable to the beneficiary. To provide flexibility to the remaining family, we recommend that any insurance proceeds received be placed into the beneficiary's own account, and not into an account held jointly with the late spouse or parent.

Consider the following calculation to assist you in determining your present life insurance needs: