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How do I calculate how much life insurance I need?

Life insurance protects you and your family from eco­nomic hardship as a result of death. It is an insurance company’s obligation to pay the recipient of your choice a pre-determined amount of money when you die in exchange for timely payment of premiums while you are living.

Do you really need life insurance? Well, do you want to provide for your family and loved ones in a manner to which they have become accustomed in the untimely event of your death? If you are the primary breadwinner, who will pay the mortgage on the house your spouse and children live in if you die? Who will provide financially for your family if you are gone? How will your children’s education be financed in your absence? And finally, how will your burial expenses be covered?

Now that you have decided you do indeed need life insurance, how much do you need and, if you already have life insurance, do you have enough? Some things you will need to consider when making this decision are:

  • How much can your family afford to pay off your mortgage loan or your rent if you die?
  • How much debt will you leave behind to include credit card balances, car loans, student loans, per­sonal loans etc.?
  • How much annual income will your death remove from your household?
  • How much will the funeral you desire cost?
  • Do you want to leave behind a charity fund in your name?
  • Do you have special family members you would like to leave a financial gift for?
  • How much will your spouse need to care for a family member with special needs?
  • How much do you want to leave behind for your children’s education expenses?

This could result in a big number, but remember the impact on your dependents if you do not have any cover in place!

One alternative is to calculate ten years of income plus the amount of debts outstanding that you cur­rently have.

Once you have calculated how much money you want to leave behind, consider how much you current­ly have in terms of individual or group life insurance along with your other assets such as savings accounts, mutual funds, stocks, bonds, pension, and retirement plans and subtract that amount to decide how much life insurance you currently need to purchase in addi­tion to any you already have in place.

The next step is to take professional advice as to the best and most competitive life companies. Your ad­viser will obtain quotes taking into account your life­style choices and compare these to match your specific needs.

Life cover is cheap in real terms for the peace of mind it provides to your loved ones. Can you really afford not to do this calculation?