While many people own life insurance in some form, more than half of all Americans have less than $1,000 to cover an emergency. If you haven’t been budgeting for the future or for a rainy day, you could leave your family up the creek in an emergency. Your life insurance needs analysis must take into account all of the worst-case scenarios when you’re determining your need.
Here are four steps to coming up with a reliable figure.
1. Calculate Your Debt
Your life insurance needs to cover the debt that you think you’ll have in the future. Since some debt is passed along to heirs, you need to ensure that you’re covered.
If you’re currently spending more than you earn, you need to account for that in your calculation of life insurance needs. As your debt grows, you’ll need to buy more life insurance to pay it off.
The ideal response would be to be able to pay down debt but in the worst case, allow your life insurance to deal with it.
2. Calculate Your Spending
If you don’t currently know how much you’re spending each month, you need to start coming up with a personal budget. While you’ll have to make some generalizations with your personal budget, you can also use bank statements to get a clearer picture.
Don’t simply guess how much you think you need in the future. Your goal is to provide for your family’s future needs. In order to protect their interests, you need to leave them sufficient funds. a
While $500,000 might sound like a lot, if you’re the sole breadwinner and you still owe $400,000 on the house, that money might go fast. Ideally, they should be able to put the money away and only take out the 5% it might earn annually.
3. Track Your Savings
Every month, you should be adding to a savings account. If you’re living within your means, you should keep doing that and make sure you’re saving adequately. In the end, you’ll need less life insurance if you’re doing a good job-saving.
Since you won’t need to replace all of your income if there are savings for your family, you’ll be in good shape if you’ve calculated your budget to keep some left over.
4. What Do Survivors Need?
If you’re leaving behind a young family that isn’t in college yet, you might need to calculate their college fees into your life insurance needs.
For a family that’s currently spending $6,000 a month to cover everything, you need to calculate several years of that amount to provide for your family.
Have a long and sober conversation with your family or your partner about how much life insurance you anticipate needing in the future.
Your Life Insurance Needs Analysis is Essential
A life insurance needs analysis is an important first step in coming up with how much you need for the future. Since your family will be relying on your policy to get through a rough time, you need to calculate carefully.
If you’re still working on how much you need for retirement, check out our guide for planning for your retirement.