Most parents seem to know that they need some form of level term life insurance. However few consumers seem to know or understand how to calculate exactly how much life insurance they may need.
A Few Basics About Life Insurance:
Term life, in opposition to Whole Life is a form of simple pure insurance on a given persons life. The pure insurance carries no cash or investment account and is typically far less expensive. Because this type of insurance policy is so much less expensive, its possible for consumers to buy a higher face value amount. Term life insurance is often the type of insurance most commonly recommended by the likes of Suze Orman, Dave Ramsey, and Clark Howard.
The life insurance process typically involves getting a quote, filling out an application, having a paramed exam, and waiting to hear if an insurance company approves you.
About Term Life Insurance:
Term life insurance is sold in bands of coverage time periods. The most common are 10, 15, 20, 25, and 30 years. This time period is the length of time that they policy has a guaranteed premium. Term Life Insurance is also sold with a face value or death benefit amount in exchange for a yearly premium. The premium can often be paid for in smaller increments of time as well.
So you have determined that you need a 20 year term life insurance policy, but for how long? How exactly do you go about determining the quantity of insurance that you require?
The Simple Life Insurance Calculation:
Although this method is far from perfect, it is good solid way to calculate your needs. Simply multiply by ten your yearly earnings. For example if you make $25,000 per year, than ten times that would be $250,000 in term life insurance. Voila – very simple and very straight forward. That is the simplest method of calculating life insurance coverage amounts.
This system involves using the “Simple Life Insurance Calculation” method and comparing it with what you can afford. Taking the above example, a $250,000 term life insurance policy, may cost you $600, let us say, for one year. However, you can only afford $400. In this example you may wish to slightly trim your overall coverage amount.
The More Complex Method to Calculating Life Insurance Needs:
This life insurance calculation method is very complex and very very far from simple. In this method you consider your total net worth, your total debts, your total yearly income, and yearly expense. From there you calculate out future expenses, generally until a time when you would no longer need life insurance. This may be when your children are fully out of the house.
An example of this might be, if you had a total net worth of $40,000 and you total expenses until your children were out of the house were say $30,000 per year for ten years or $300,000. You could subtract out the $40,000 from $300,000 and discover a potential $260,000 need for a ten year life insurance policy. This example in itself if very simplistic and there are so many moving parts to this calculation method. This method is often best done with detailed information, sometimes with a financial planner.
Scott W Johnson is the owner of Whole Vs Term Life Insurance, a site dedicated to assisting consumers is learning about life insurance and selecting the very best choice. Their motto is: “Life Insurance is Complex, Don’t Get Lost.” Johnson lives and works in California.