How to Assess Your Life Insurance Needs

Ensuring financial security for your family in the event of your passing is of utmost importance if they rely on your income. However, life insurance often remains a neglected aspect of personal finances.

A 2023 study by Life Happens and LIMRA, which closely tracks life insurance trends, reveals a startling fact: nearly 50% of Americans admit to having no life insurance coverage whatsoever, despite 39% expressing their intention to obtain such coverage within the next year.1

Understanding the Role of Life Insurance

Recognizing the pivotal role life insurance plays in safeguarding your family’s financial well-being is the initial step. The subsequent crucial task is determining the appropriate amount of life insurance you may require.

Numerous factors influence the cost and availability of life insurance, encompassing age, health, as well as the type and extent of coverage chosen. Life insurance policies entail various expenses, including mortality and other charges. Premature policy surrender can lead to surrender charges and tax implications. Evaluating your insurability is a vital consideration before embarking on a life insurance strategy. Any guarantees tied to a policy hinge on the issuing insurance company’s ability to honor claim payments.

Guidelines for Estimating Insurance Needs

A frequently referenced guideline for estimating insurance needs revolves around your income. One common approach suggests that a life insurance policy valued at five times your annual income may be adequate, while others advocate for coverage up to ten times your yearly earnings.

For a more precise estimate, consider undergoing a “DNA test,” or Detailed Needs Analysis, which takes into account various financial commitments to offer a more accurate assessment of your insurance requirements.

Identifying Needs and Obligations Begin by compiling a comprehensive list of your financial commitments:

  1. Short-Term Needs: Determine the funds required for immediate expenses like funeral costs, final medical bills, and outstanding debts such as credit card balances or personal loans. The amount allocated for short-term needs should align with your specific circumstances.
  2. Long-Term Needs: Calculate the amount needed to sustain your family’s current standard of living, covering essentials like housing, food, and clothing. Don’t forget to factor in discretionary expenses such as travel and entertainment. Pose the question: “What annual amount is necessary to maintain our present lifestyle?”
  3. New Obligations: Anticipate future expenses, considering evolving family dynamics. Account for potential obligations like childcare, support for aging parents, and college costs. Factoring in these prospective commitments provides a more precise picture of your ongoing financial needs.

Deduct Current Available Assets

Subtract your existing liquid assets, which are assets that can be readily converted into cash at a predictable value. Keep in mind that houses and cars are typically not considered liquid assets due to potential time constraints associated with their sale. Additionally, selling a home might alter your family’s current standard of living.

By subtracting your needs and obligations from your liquid assets, you can arrive at a more accurate estimate of the life insurance coverage that may be necessary. While this exercise serves as an excellent starting point for understanding your insurance needs, a more comprehensive review may be advisable for a thorough assessment of your specific situation.

1., 2023