Purchasing the Right Amount of Life Insurance

Purchasing the Right Amount of Life Insurance

Life insurance policies may not be appropriate for everyone, but they are an important tool in our toolbox. Certainly anyone with a family to protect has spent at least some amount of time considering the "worst case scenario." 

Determining the right amount of life insurance coverage is a difficult task. How much will your spouse need to cover his/her expenses, as well as the expenses of a child or children? Will your spouse continue working, or raise your children full-time? Many people adhere to simplistic rules of thumb, such as a "multiple of income," to calculate their coverage amount. While this is certainly one approach, it may not offer the full peace of mind we seek. The best method is to clarify and quantify your family's needs as best you can. While this does require some time, calculations, and an uncomfortable conversation with your family, it is likely to provide a greater feeling of security. 

Consider the following four-step process:

  1. Identify your needs 
  2. Quantify those needs
  3. Determine how much existing capital or insurance is available
  4. Calculate the amount of additional capital required

Identify your needs

It is critically important to determine, as a family, what is it you want to protect. Will your family be able to maintain their current lifestyle? Is it important that your children have funds available to pay for college?  These and other family goals should be considered thoughtfully.

Quantify the need

Immediate cash needs might include:

  • Outstanding debt (mortgage, student loans, credit cards)
  • Final expenses, including funeral costs, estate settlement costs, medical expenses

Final expenses shouldn’t be underestimated, especially if you have a relatively complex estate. It is important to coordinate with your financial planner, your accountant, and your attorney to determine the most efficient way to distribute your assets.

When considering the approximate value of a college education or other future goals, it makes sense to estimate the present value of these expenses and then multiply by an inflation factor to determine the future need.

Income replacement needs should be determined based on the amount of lost income and the ability of surviving family members to replace all or a portion of it. Quantifying the income replacement need can be a little more complicated. However, it is important to use realistic assumptions and base the estimate on the family's current budget requirements. Again, you can calculate the approximate present value of these needs and then multiply by an inflation factor to estimate the future amount. 

Determine how much capital is available

Take an inventory of your liquid assets, retirement plans and existing life insurance.  If you own a business or real property, you would need to determine whether these assets will be liquidated or sold and consider any associated risks that may alter their value. 

Calculate the amount additional capital required

Subtract the amount of capital available from your family's future financial needs to find how much life insurance you should have. 

While this process still relies on assumptions and estimations, it should produce a number that makes you and your family a little more certain of the life insurance benefits you actually require. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2016 Advisor Websites.

Securities offered through Level Four Financial, LLC, a registered broker dealer and member of FINRA/SIPC. Advisory services are offered through Level Four Advisory Services, LLC, an SEC-registered investment advisor. Accounts carried by Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC. Neither Level Four Financial, LLC nor Level Four Advisory Services, LLC offer tax or legal advice. Please contact your tax or legal professional for specific information regarding your individual situation.
 
Level Four Financial Registered Representatives associated with this site may discuss and/or transact securities business only with residents in states where they are registered. Please refer to https://brokercheck.finra.org for additional information.
 

Banner images by Bob Oller: Oller Studios

Insurance Licensed States: Virginia

Securities Licensed States: California, Florida, Georgia, Maine, Massachusetts, Michigan, North Carolina, Ohio, Virginia, Minnesota, Colorado, Pennsylvania, Texas, New York, Arizona, Maryland

Please refer to Our Team page for a list of specific states in which each Financial Advisor is registered to conduct business.

Website Design For Financial Services Professionals | Copyright 2024 AdvisorWebsites.com. All rights reserved