There is a lot to consider when figuring out how much life insurance you’ll need in the event of your untimely death. Your family will need to cover living expenses, the cost of your funeral, and possibly have money to cover any outstanding debts, education, and other future costs.
If you’re considering a term-life policy to take care of your family, we’ve compiled a list of considerations based on a $50,000 per year annual income.
Basic Living Costs
Photo by Richard Levine/Corbis via Getty Images
How much do you make every year? We’re going to assume you earn $50,000 before taxes. If you want to care for your family until your children are of legal age (18 years old), you’ll want to start by multiplying your annual income for the number of years required.
For example, if you have one child aged 10, you’ll want $400,000 to care for your wife, husband, or another partner, and child for the next eight years. On a positive note, your life insurance money will be given to your spouse tax-free, giving them a cushion of cash compared to your taxable income.
How Much Debt Do You Currently Have?
Do you have $25,000 in outstanding credit card bills, car payments, and other bills? Consider adding this to the total amount your family will need to pay if you die. Simply add your debt to the amount of cash you’ll leave behind.
Paying off credit cards, home improvement bills, and other debt will help relieve some of your family’s burden.
Don’t Forget The Cost Of Your Own Funeral
Photo Credit: Chris Hondros/Getty Images
The Huffington Post conducted an analysis of the average funeral cost and it’s a shocking $11,000
Buying a casket, embalming fees, a burial plot, and sending out invitations to family and friends, are just a few of the expenses that will quickly cost your loved one’s money.
Bonus tip: Many employers offer programs that pay for your funeral in the event of your death. Make sure to check with your employer to see if this is part of your compensation package.
How Much Cash Do You Have In Savings And Investment Accounts
It’s a sad reality that 29% of Americans have less than $1,000 in savings according to MarketWatch. Only 14% of people have at least $10,000 in savings.
A Savings account can provide your family with an extra cushion of cash until your life insurance policy kicks in. That money, tied up in mutual funds, a standard savings account, and other investments could provide for sudden expenses that pop up following your death.
What About Education?
Photo Credit: MARTIN BUREAU/AFP/Getty Images
NerdWallet investigated the cost of different higher education programs and found these average costs.
- Public, 2-year in-district: $3,520/year;
- Public, 4-year in-state: $9,650/year;
- Public, 4-year out-of-state: $24,930/year;
- Private, 4-year: $33,480/year
Tuition continues to increase in price but let’s assume you want to save your a 4-year in-state education for your child. You’ll want to add another $38,600 to your life insurance policy. Keep in mind that college tuition continues to rise which may leave an extra burden on your family if paying for your child’s education is important to you.
What’s That Mean For Your Savings Total?
If you earn $50,000 per year and want to provide for your family for eight years with enough cash for your child’s education you’ll need $449,600. Throw in $25,000 in credit card and other debt and you’ll quickly approach an insurance policy worth $500,000.
Keep in mind, inflation can quickly eat into your family’s ability to pay bills. An increase of 3% per year means your $50,000 salary will be worth $1500 less in year two.
How Much Will Life Insurance Cost?
Photo Credit: Chung Sung-Jun/Getty Images
If you’re worried about the cost of life insurance, the best suggestion we can make is to shop around. If you’re not overweight, a non-smoker, and in general good health, some highly-rated companies may charge you less than $50 per month for a 20-year term life policy.
Be careful when choosing a life insurance policy and be sure to choose a reputable agency. Also, be sure to disclose any health problems, surgeries, and other incidents from your past. Answer all of the insurer’s questions honestly or your policy could become invalidated upon your death.
Some Commonly Accepted Rules
A general rule of thumb is to assume your child will need $100,000 for college tuition, books, and room and board during four years of higher education. We find this number to be exorbitant and based on a private education or out-of-state costs.
The Rule Of 10 says you should multiply your annual salary by 10 years. This helps provide for childcare if your spouse returns to work and allows for an income cushion for unexpected expenses such as increased healthcare and childcare costs.
Consider the DIME Rule which takes into account Debt, Income, Mortgage payments, and Education. We covered all but your mortgage expenses in our analysis. If you owe $100,000 on your home, consider increasing your life insurance policy payout so your home can be paid off in full. Paying off your mortgage is highly advisable if you are capable of increasing your monthly life insurance premium cost to cover that expense.
Finally, talk to a professional. You may save money and put your family in a better financial position if you tie your life insurance policy into your overall financial planning structure.