How to Figure Out How Much Life Insurance You Really Need
Protecting the financial security of your kids is just as vital as keeping them healthy and making sure they get an education. Yet for many families, the pressure of keeping up with current expenses pushes one strong tool for doing that -- buying life insurance -- to the bottom of the to-do list.
A 2013 survey by life insurance and financial services association LIMRA found that 30 percent of U.S. households have no life insurance at all, and 50 percent think they need more life insurance.
The LIMRA survey found that among consumers who say they need to buy life insurance, 86 percent say they haven't purchased it because it's too expensive. And more than half of those surveyed said that everyday expenses like food, clothing, transportation, and energy costs limit their ability to save for the future, or to buy life insurance even when they know they need it.
Keeping Your Household Afloat
What would it cost to keep your household running if your income suddenly went away? That's the basic question you need to ask when trying to figure out your life insurance needs.
%VIRTUAL-article-sponsoredlinks%"The financial contributions you make to your household are critical to the security of your loved ones, and extend well beyond your income," says Damon Bates, vice president of MassMutual's U.S. Insurance Group. "However, many people are uncertain about how to measure their financial contributions, which makes it difficult to determine an appropriate amount of life insurance."
There are some broad rules of thumb when it comes to figuring out how much life insurance you need. According to the CUNA Mutual Group, a company that provides financial services to credit unions, one of those guidelines is that you should buy life insurance equal to five to seven times your income.
But the key is getting the right coverage for you and your family -- not some generic family unit.
There are helpful online tools that can help you get more customized answers:
The LifeHappens.org life insurance calculator, like many others, compares potential expenses and your savings, such as the need to cover final expenses for a funeral and for ongoing income to take care of your family. The calculator looks at your outstanding debt including your mortgage; the need for college savings; and how much your family needs for living expenses measured against your current savings, investments, and retirement funds.
CUNA has a calculator on its website to help you get a more individualized estimate of your life insurance needs.
MassMutual's Lifetime Economic Value toolmeasures all of the economic contributions you'll make to your family over the course of your career. Via a simple calculation -- requiring just your age and income -- it generates a broad life insurance estimate. (For example, a 40-year-old making $60,000 and planning to retire at 65 would need an estimated $1,151,761 to protect his or her family.)
The more information you provide for any of these tools, the more accurate its estimate will be. Coverage should include more than simply replacing earned income, says MassMutual's Bates: "It [should] also include other items of financial value that are vital to maintaining your family's standard of living, like benefits that your employer provides, retirement plans, and personal service that you provide for your loved ones. These benefits and services, less the value of what you would personally consume, are meaningful and measurable components of your lifetime economic value."
Unfortunately, there's no actual magic formula that simply tells you how much you need to buy, but these online calculators can help you match what you need with what you can afford to pay for life insurance.
Michele Lerner is a Motley Fool contributing writer.