First, you should determine what expenses the policy should cover. For most people, the death benefit should pay immediate costs related to your death, help meet your dependents’ daily living expenses, and set aside money for future needs, such as education. Of course, your dependents may need more or less, based on your existing assets, their own income and assets, and whether they’ll receive income from Social Security or other sources.
Keep in mind, though, that the life insurance policy that’s right for you at one stage of your life may not provide the coverage you need at another. For example, you may decide to convert a term insurance policy to a permanent policy to lock in lower premiums. If you have universal life, you may want to take advantage of the option of increasing your death benefit. When an insurance review is a regular part of evaluating your financial plan, you’ll be more likely to make changes when they’re appropriate rather than risk waiting too long to update.
A life insurance calculator can help you come up with a ballpark figure as you begin exploring your life insurance needs. But it can’t take you as an individual into account. You should modify the basic coverage the calculator suggests to come up with a more precise amount—by adding money for special purposes or subtracting things that don’t apply. Here are some things you may want to consider:
Some life insurance calculators list your mortgage balance as a one-time expense. If your dependents plan to sell the house at your death, you may want to provide a lump sum to pay off the mortgage. But if they’ll continue living in the house, you can include the mortgage payments in your living expenses calculation.
When you calculate your college fund contributions, you may not have to provide enough to pay for a full four years of college if your family invests some of the death benefit in a special education-savings account. And if your children are of widely differing ages or have extraordinary expenses—say, you’re supporting a world-class ballerina or a competitive golfer or tennis player in the making—you might want to take the extra step of calculating costs for each child separately.
Don’t forget your human value. The earnings on death benefit proceeds need to replace the lost income of the policy insured. A person lifetime earnings potential could be in the millions of dollars and the death benefit amount needs to reflect that.
Contributions from the book Guide to Understanding Life Insurance in this press release are used with permission from Light Bulb Press.