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Ask WomensFinance? : Answer |
Q: How much life
insurance do I need?
A: This
is the most important question you'll face when buying life insurance. To answer it
correctly, you need to take into account your individual needs and circumstances.
Some important questions to answer:
- What is your current lifestyle?
- What kind of lifestyle do you want for your heirs when you die?
- What are you current assets and liabilities?
- How many children do you have?
- Do you plan on sending your children to college?
Are you saving for private or public college for your children?
Is you spouse currently working?
Will your spouse be able to re-enter the workforce if needed?
You're an ideal candidate
for life insurance if your demise would create financial harship for your loved ones.
You'll want enough life insurance to meet your family's financial needs but not so little
that you're underinsured. If properly invested (treasury rates), the death benefit from
your policy should be enough to cover your family's living costs -- offset any shortfalls
that are not already covered by social security or other assets you've left behind.
Example: Assumes a death in the family that causes an income
shortfall for the remaining dependents. Living costs outweigh any source of income that is
left. A $400,000 life insurance policy should make up for the shortfall ($400,000 x 6%
treasury rate = $24,000/year in interest income).
| 1. Source of Income |
$22,000 |
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(salary, etc.) |
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| 2. Living Costs |
$46,000 |
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(mortgage, etc.) |
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| 3. Income Shortfall |
$24,000 |
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(step 2 minus 1) |
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| 4. Divide by 6% |
6% |
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(treasury rate) |
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| 5. *Policy Needed |
$400,000 |
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(for income) |
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*There may
be a need to increase the policy coverage in order to pay off educational expenses,
existing mortgages, or other outstanding debts.
The previous example is only a scenario. Your situation is likely different and requires
the consultation of a financial planner or insurance agent who will complete a more
thorough analysis of your needs.
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