If you are not sure how much life insurance you need, you may want to consider using a life insurance calculator before you start retrieving quotes for random amounts of coverage.
Life insurance is a financial product that is used to provide your family with financial protection when a breadwinner in the family passes away. As you can imagine, covering mortgage payments, car payments, and other expenses on one income can be very difficult for the surviving spouse when the deceased spouse did not have insurance. Covering expenses can be almost as difficult when the deceased spouse did not purchase enough insurance. Read also: The Best Life Protection.
Here are some tips on how to calculate how much insurance you need, what type of life product is best for you, and how a life insurance calculator can be a valuable tool for you when you are buying your insurance policy.
How to Avoid Having Too Little or Too Much Insurance?
When you call an insurance agent to ask for a life insurance quote, it is very common for the agent to ask how much insurance you think you need. If you are asked to come up with a figure off of the top of your head, you might just blurt out a number that sounds reasonable. If you are not sure how much premiums for life insurance cost, you might say a very small number without even considering how much money your beneficiaries would need to live a quality life.
Buying too much insurance is almost as bad as buying too little. While your beneficiary may get a large payment assuming you pass away within the term, you are spending too much on your coverage if your outlive your insurance. If you speak with a sales agent, you need to understand that these agents will earn larger commissions on larger policies. Read also: How to Find Affordable Life Insurance Quotes?
This is why it is extremely important to find out how much insurance you really need. Every family’s needs vary. Some families earn very large incomes and have a very expensive home. Others do not have much debt. This is why you should use an insurance calculator to come to a concrete number before you start requesting quotes.
Factors to Consider When Calculating How Much Insurance You Need
You cannot just use the amount you owe on your mortgage to calculate how much insurance you need. While this is a figure you need to factor into your worksheet, there are several other factors that are commonly overlooked. To calculate your lump-sum needs, you will need consider each of the following expenses that may exist at the time of your death:
- Final Expenses: Currently, it costs about $15,000 to plan the average funeral.
- Outstanding debts other than your mortgage.
- Outstanding principal owed on your mortgage.
- College fund needs for each of your school-aged children.
- The total annual income your family would need if you died.
- How many years you will depend on income replacement.
- Estate taxes your family will need to pay when you pass away.
You will need to deduct certain figures from your calculations as well. Here are some figures you can deduct from the total you calculate:
- Retirement savings: Includes pension, profit sharing plans, and 401(k) accounts.
- How much life insurance you have in force.
Also take into account the average inflation rate when you are planning for the future. Most individuals use 3% inflation to be fair. Read also: Consider More Than Just Price When You Compare Life Insurance Quotes.
Why You Should Use Calculator to Calculate the Estimated Figure For You?
Calculating your expenses may be easy. When you get past this section, you will need to use a number of different formulas to calculate your need for income replacement and to calculate how much inflation you should take into account. If you are not a mathematician or a professional financial adviser, calculating your need for life insurance properly can be difficult. Calculators are available to help you evaluate how much insurance you need easily. In fact, with the right calculator, you can fill in the blanks and let the computer do all of the hard work for you.
Determining your life insurance needs does not have to be difficult. With a nifty tool like a life insurance calculator, you can ensure you are buying enough insurance the next time you apply for a policy. Make sure you invest in the protection your family needs and it will give you peace of mind so that you can live your life to the fullest. Read also: Understanding the Need for Permanent Life Insurance.