Sunday 24th of January 2021

Assessing Your Life Insurance Needs

Shopping for life insurance can be difficult because, in order to choose the right policy, you basically have to decide what your life is worth. You may have heard many different suggestions on how to compute this as you’ve looked for a policy. The problem with these formulas is that every person’s situation is different. People with identical incomes, for example, may still have vastly different life insurance needs. In this post, we’ll give you some guidelines on how to assess your situation accurately.

Capital-Needs Analysis

The capital-needs analysis is a method for computing your coverage needs that has been used by experienced agents and financial planners for decades. This method is superior to others mainly because it factors in all of the aspects that make your situation unlike anyone else’s. You shouldn’t have to guess how much life insurance you need. Not only is that risky, but also highly inaccurate. Capital-needs analysis accounts for everything from funeral costs to the extra funds ($20,000-$25,000) you should include in your policy’s death benefit for special considerations that might arise.

Number-One Factor: Dependents

Marital status or even whether you have children is not the primary factor in determining your requirements. The real issue is whether you have dependents—people who rely on you for partial or full support. The number of dependents you have is also an important issue. Here are some other things to consider:

  • Your family’s standard of living.
  • If you have a nonworking spouse, he/she wouldn’t have an income if you died.
  • If you have a working spouse, would he/she need to retire to raise your kids?
  • Supplemental sources of income, such as a second paycheck.
  • The debts you would leave behind, such as mortgages, car loans, credit card debt, etc.
  • The expected college expenses for your children.
  • Special needs of your children, such as a child with disabilities who is unable to support him/herself.
  • Parents who may eventually have to rely on you for care.

What about Divorced People and Singles?

If you are divorced or single, you may not need life insurance. However, there are some scenarios where life insurance wouldn’t be a bad idea. For example:

  • Your outstanding mortgage balance exceeds the appraised value of your home.
  • You have a co-signer on your mortgage who would be stuck with the debt if you died.
  • You want to leave money to a friend or relative.
  • You would like to donate money to a charity or nonprofit upon your death.
  • Your parents would not be able to manage physically or financially if you died.

Additional Resources