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Tuesday, March 16, 2010

How to Determine the Proper Amount of Term Life Insurance Coverage For You

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We all know that we need life insurance in order to protect our families in the unexpected event of our untimely death. We all know that we need it, but how do we determine how much coverage we should have? A friend in the business once joked that, "you should have enough coverage to ensure that you family is protected, but not enough that you have to sleep with one eye open." That is a rather simplistic joke, but it let's us know what our goal is: making sure that our family doesn't have to struggle when we are gone.

The first step is to take a look at all of your debts. The very first step is to ensure that you have enough insurance coverage to pay off all of your debt. This is especially the case if your spouse is home with the children. It is bad enough to lose a spouse, but to immediately be forced into working and putting the children into child care is no way for your family to have to deal with their grief. As a starting point, we need to make sure that enough insurance is in place to cover all of your existing debts. This will give your family a clean slate to start with. However, this is not the only thing to consider.

Another consideration is any immediate needs your family will have for cash. Obviously, everyone should have some emergency savings in place, but sometimes it is difficult to build up the proper amount. Initially, your family will need to pay for your funeral, and they will also need enough money to get them through for a couple of months. Take the amount that they will need during this time, and subtract from this number the amount of liquid savings that you currently have. This will give you the amount of additional insurance that you will want to have in place.

There are two ways to figure the amount of coverage that you should have in order to meet the long term needs of your family.

The easy way is to simply take your annual salary and multiply this number by eight to ten. This will allow your family to invest the money into good growth mutual funds and live off of the growth without ever touching the principal. This will allow you to make sure that they are taken care of for the rest of their lives, and still be able to leave a legacy for your children.

The more complicated way to determine this is by basing it on your family expenses. This method is based on providing for your family's needs for a set number of years. To determine this, look at your family budget, and figure out how much your family needs in order to meet their needs in a typical month. Take this number and multiply it by twelve to determine the amount they will need in a single year, and then multiply this number by the years that you want to be able to provide support for.

Now let's look at some actual numbers. In our example, you have $50,000 in debt, $10,000 in emergency savings, and you earn $30,000 per year. You have also determined that your funeral expenses will amount to roughly $5,000, and your monthly expenses amount to $2,500. Using our above numbers, we would first need $50,000 in coverage to clear the family debt. Now for the initial expenses for the first couple of months, we would need $5,000 for living expenses and $7,000 for the funeral. Subtract your emergency fund of $10,000, and this leaves you with a need of $2,000 in extra insurance. You have a base insurance need of $52,000. In the first method for determining your income needs, all you would need to do is multiple your salary by ten, which would give you a coverage need of $300,000. Using the second method, let's assume that your family will need protection for fifteen years. In this method, they would need $450,000 ($2,500 times 12 times 15). So, in this example, your insurance needs will be either $352,000 or $502,000, depending on your calculation method.

Many different companies can offer you quotes on term life insurance, and it is very reasonable today.

Multiple companies can offer you quotes on a return of premium life insurance policies.

Article Source: http://EzineArticles.com/?expert=David_Sayers

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