How Much Life Insurance Do I Need?
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Making the decision to own life insurance is one thing ... but deciding on how much life insurance that you may actually require to meet the needs of your beneficiaries is another thing altogether.
There are a number of ways to approach the exercise but, basically, you will need enough money to achieve at least some or, better still, all of the following;
a) retire any existing debt
b) provide for any anticipated education costs
c) cover the household's immediate cash needs
d) create a source of ongoing income for the family
e) resolve any final medical expenses
f) pay funeral costs
The same considerations above can be applied to both partners in a family situation because, whether both are working or not, it may be best to provide sufficient financial resources to enable the surviving partner the financial freedom to achieve the family's goals without being forced back into the workforce or to re-marry.
Often a working, single parent will need to make choices between work and children. When a non-working parent dies with sufficient life insurance, the surviving partner should be left in a financial position whereby children can always come first.
Social security entitlements can be of help to a non-working single parent - however they are very much based on subsistence-level income.
Retiring Debt
First on the list - only because it's always the easiest to calculate - retiring existing debt is imperative. Debts in your name and in joint names will need to be paid. They don't die with you!
Home mortgage/s, personal loans, car loans, credit cards, store cards, etc, etc.
Ideally, to minimize financial stress, there should also be sufficient money left behind to payout any loans or credit cards in the surviving partner's name.
Education
In the event that you have dependents, particularly children, you will want to ensure that your plans for their future education will survive you. In other words, you should identify the total amount that your family's future education will cost over the years, including tertiary education, if you had to pay it all now, in advance.
Don't forget to include the cost of uniforms, books and school excursions etc.
Education expenses, having been separately identified in the calculation, can be set aside (either arbitrarily by the survivor or specifically identified and controlled by a Will) to be invested for the purposes of future education. Interest earned on the 'education investment fund' over time should help cover future cost increases.
Immediate Cash Needs
Following a death, families need time to grieve. The first few months are a difficult enough time for a family without having to worry about money.
Having 2 or 3 months income earmarked to meet the family's immediate needs, in addition to covering off everything else, will give them the ability to deal with the emotional issues without the need to be too concerned about the financial ones in the short term.
You should add sufficient to this amount to cover the total of any taxes that may be due at any point of time.
Ongoing Income
Although all of the loans, debts, education and other expenses have been covered, the family will still need an income in order to survive and prosper.
It's just a matter of figuring out how much income per year is desired and for how many years. Once that calculation is done, it's just a matter of calculating how much you would need to invest in order to get a return sufficient to cover it.
The amount of income will need to comfortably cover all of the monthly needs and expectations of the (now mortgage-free) family.
The amount of time that the income will be needed is very dependent upon whether it's likely that the surviving partner would return to work at some stage and, if so, when.
The choice may be for the survivor to resume work after a certain number of years when the children reach a certain age - or not to return to work at all. Returning to the workforce after an extended period can prove difficult at best.
As with the education expenses, you might simply multiply the annual income need by the number of years it's required and assume that the return on the money, when invested, will more than compensate for inflation.
Alternatively you can use an annuity calculator to work out how much you would need to invest to provide the desired income, indexed to inflation over the required number of years including allowance for interest earned on the investment.
Final Medical Expenses
Even with the very best of private health insurance, there may still be significant costs in relation to dying. It is usual for a family to seek the absolute best medical attention that they can get in order to keep a loved one alive. If you don't set aside a nominal amount for this possibility, the money will have to come from somewhere else.
Funeral Costs
No matter how modest your farewell pans may be, funerals cost money.
A quick phone call to a funeral director will help you put a figure out what your funeral preferences might set you back.
A final word!
To balance the equation, there are some things that can safely be DEDUCTED from the total amount of life insurance cover required.
For example, any existing life cover, including any superannuation benefits payable on death can be deducted.
Any assets that would inevitably be SOLD on death also need to be taken into account. The value of these will reduce the required cover amount.
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Editor's Note: Financial Services Online provides a free online calculator that uses the above approach in helping to determine the amount of life insurance cover you may need.
When you have calculated how much cover you need, you can
start your life insurance quote here
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