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Life Insurance Coverage: The Right Amount

Figuring out the right amount for your policy can be daunting.  However, it can be done in a systematic fashion.  Follow along to continue our theme with more advice; this will allow you to find and follow through with the right amount.

Having Fun with the Formula?

We left off with the formula itself, along with some imposters that shouldn’t take up too much of your attention.  As you might have noticed and hopefully experienced (yes, action is good), it is extensive.

Indeed, that is the truth.  After all, what would you expect when looking at all the finances that your family will need when you die now – and then again as you re-evaluate it?  It is quite the formula and task.

It can be helpful to treat the formula as a budget.  It may sound odd, but try to categorise everything.  For instance, in your short-term needs, you might put all of those expenses that come with your passing together – attorney, medical, and funeral needs.  As we will see in another example, you can note that these are static – they won’t change in 10 years (unless you want inflation to be involved).

In the long-term needs category, you could create another category for your children’s education needs.  If you want to be really precise, a subcategory could be college tuition.  Here you would need to use current figures to come up with an estimate.  However, in this case, it would not be static – you could easily remove this at the appropriate time in your children’s lives.

These tips can help you leverage your life insurance strategy.  For instance, if you are using term life insurance, you could save on premiums by lowering your needed coverage once items are removed from the various “needs” categories.  Your home might be paid off and the children at college once you need to find a policy – get a different one and save.

The Buffer

You’ll need to be careful with some amounts in your formula.  Are you really counting on $20,000 worth of stocks to stay on pace, or even be worth that amount?

Certainly some of these figures can fluctuate greatly.  For instance, you might lose your job and be forced to liquidate monies from investment and savings accounts.  In that event, you could be shortchanging your family on life insurance payouts that could be critical.

This lends to two important lessons to consider.  First of all, you should be constantly re-evaluating your life insurance needs.  Secondly, you might include a decent buffer, just in case.  As you can imagine, your family having an extra $50,000 versus the opposite is a big deal – and it’s probably not that much of a difference in your premiums.

Overall, there are some interesting ways to approach what you may need for life insurance.  Like a budget, approach it systematically to give yourself clarity and a way to look at the big picture.  Perhaps you’ll find room for an interesting strategy, such as the example outlined with term life insurance.

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