 large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts.
Determining how much insurance to buy requires you to invest some time in calculating...
Your current annual household expenses
- Your assets, debts, and other sources of income.
We've provided a work sheet, which we will refer to in our discussion.
Tip: Find out how much insurance you need before considering which type of insurance to buy. Having enough is more important than having the right type. You should provide for your insurance needs immediately, although you can always switch to a more cost-effective or investment-oriented type of insurance later.
The ideal amount of coverage is the amount that would allow your dependents to invest the insurance proceeds after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb-to buy five, six or seven times your annual salary-may serve as a starting point, it is no substitute for making the calculations to find out how much you really need.
By using the worksheet and our explanations, you will be able to make a fairly good estimate of your insurance coverage needs. You will need to make some assumptions about your family's future. It's important to be as accurate as possible in filling out the worksheet, since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.
Here is a line-by-line discussion of how to prepare the worksheet.
Line 1: Calculate The "Annual Income Needed"
Line 1 of the worksheet, "Annual Income Needed," is the amount that your survivors would need to live comfortably. It is important not to underestimate this amount. If there are recurring expenses that your family incurs but that are not shown on the list below, do not neglect to include these.
To arrive at the "Annual Income Needed," find the following amounts paid monthly. Then multiply the figure you arrive at by 12 to arrive at an annual amount. Add the following amounts:
|Mortgage or rent, and other home-related expenses. Include your monthly mortgage payment, with insurance and real estate taxes, or the amount paid for rent. Also include the amounts you spend monthly on home repairs-e.g., plumbers, contractors, electricians, appliance repair-and on home improvements. Add to this the amounts spent monthly on furniture, appliances, linens, and other items bought for the home||$___________|
|Heat, electricity, insurance (life, health, and liability) water, gas, trash collection, and other monthly bills||$___________|
|Food, including other items bought at grocery stores or drug stores, such as toothpaste, and including restaurant bills||$___________|
|Travel, including car payments, gas and oil, car repair, and car payments||$___________|
|Child care or other dependent care||$___________|
|Recreation, including travel, gifts, theater, cinema||$___________|
|Multiply by 12 and enter amount in Line 1 of the worksheet (below)||$___________|
Line 2: Subtract "Other Sources"
The next item on the worksheet represents the income that your survivors will have. If there are sources of income other than the ones listed, do not neglect to include them.
Tip: To calculate Social Security benefits, you may wish to obtain an estimate of your benefit from the Social Security Administration. You can obtain a request form by calling SSA's toll-free number-800-772-1213.
Since you cannot predict the amount your survivors will receive (it will depend on your age at death, your earnings, and the ages of your children), you may use the following as rough estimates: $4,000 per year if you have one child under 16, or $5,000 for two or more children under 16.
Do not include other insurance proceeds here; this will be accounted for later.
Line 3: Determine The "Shortfall"
Line 3 represents the shortfall, i.e., the amount you need your insurance proceeds to replace. This is determined by subtracting the "Annual Income From Other Sources" amount from the "Annual Income Needed."
Line 