The following is from an email written in October of 2012.
I was sitting with a friend of mine recently at a networking event. She turned to me at one point and said “I don’t know if my husband and I have enough life insurance but I’m pretty sure it’s not enough.”
As the meeting concluded, I asked her if she’d like to know how to calculate the proper amount of life insurance coverage. She said she would.
I took out a handy little notepad and wrote down these simple items.
- Debt =
- Final Expenses =
- Emergency Fund =
- Education Expenses =
- Monthly Income = X 12 X 20
- Special Needs or Charity =
The explanation is as follows…
- Write in the amount of any debt that you’d like paid off if you or your partner were to die.
- Add up what final expenses you might have like burial, legal, or medical expenses.
- How much would you need to fully fund 6 months of emergency savings?
- You may or may not be planning to pay for education for your children if you are alive. If you would like to provide for a child’s education in the event of death, enter that amount.
- How much would you need monthly to cover expenses and carry on? Figure this amount by determining if you would WANT to work or if you would WANT your spouse to work if you were to die. You multiply that amount by 12 months in a year and by 20 to allow for the funds to have a relatively good chance of lasting for the foreseeable future. For increased safety, multiply by 25 or 30.
- Enter the amount you would like to provide upon death for any special situation or charitable organization.
My friend stated that she surely didn’t have that much coverage and that their financial planner hadn’t talked this over with them when they purchased their life insurance. As it turns out, she was probably right!
If you add up all of these numbers for your personal situation, you have determined the amount of life insurance that YOU want. With life insurance rates at or near all time lows, why not cover that amount right away? Your rates aren’t likely to go down any time soon. (Check term rates on the website)
Who do you care about that might need to review their situation? Go ahead and ask “Just out of curiosity, how do you know if you have the right amount of life insurance?”