Deciding how much life insurance you need comes down to what are your priorities and current financial commitments. There are some basics to follow which will give you an idea of how much cover you may need.
Repay All Debt
You should make sure you repay all debt in the event of either spouse. In most cases, the surviving spouse will struggle financially and will not be able to meet joint financial commitments, especially if the household has lost an income. If you think your spouse will be fine and you don’t need any Life Insurance, try living on the other spouses’ income for a month and test your theory. I know that’s a bit of a loaded statement but it does make you think.
Provide for Dependents
Children are expensive! and they need to be provided for until they are old enough to look after themselves and become financially independent. The younger your children are, the more you will need to insure for because they will be financially dependent longer. You should do is calculate how much does it cost for each child each month, then annualise it, then times it by the number of years they would still be dependent. Repeat the process for each child. This is not an exact formula but it will give you some idea to help you calculate how much Life Insurance you need.
Life Insurance for Spouse Provision
If your spouse is a full-time homemaker, think about the financial impact to the household if it lost the primary income. If the surviving spouse is an income earner, the amount of Life Insurance required would be less because the financial impact would be less.
The loss of the sole income earner
In the case where there is a total loss of household income, what it would cost to hire a housekeeper? Or maybe a nanny or daycare.etc to do all the daily tasks to run your household per month. You should also give consideration to the surviving spouses’ ability to earn income and take that into consideration. For example, the surviving spouse may already have the ability to slot into a job with little or no impact on the running of the household.
The loss of the partial income earner
The negative financial impact is less if there is still a household income earner but still puts a massive strain on your commitments if you have budgeted for a higher income. Try living on one income for a month, this will show whether you can live on one income or not. If you are currently reliant on 100% of the deceased spouses’ income, then you should consider replacing this income entirely.
How do I calculate lost income?
Keep it simple and you can use slight variations depending on your situation; for example, if you did not want to replace an income but may have increased expenses, then use that amount instead of the lost income.
- Calculate the lost annual income
- Calculate any additional annual expenses
- Times it by the number of years you need this replaced
- Insure for this amount
Note: There are some unique insurance products that instead of paying you a lump sum of Life Insurance, they can pay your family a set regular monthly income for a fixed period of time.
Legal and Last Expenses
Make sure you have allowed for legal and last expenses. It’s no cheap to die so don’t leave your family with that financial burden.
Summary
It short, clear all debt and make sure family members who are financially dependent are looked after until they are at an age or status where they can look after themselves. There are other considerations such as education, time out for the family and contingencies. If you have any questions or need any help, please contact us.
