How much life insurance do you need?

How many times have we read a heartbreaking story about the breadwinner of a family dying without adequate life insurance for his or her survivors?

Life insurance is a crucial risk-management tool for many people.  How much is appropriate?  We advise against using one of the typical rules of thumb that some people go by, such as multiples of annual gross income or various ratios, because everybody's situation is unique.

A proper determination of life insurance needs starts with projecting your dependents' future expenses.  Keep in mind that dependent expenses will change in the future as your children begin supporting themselves.

The next step involves determining future income that will be earned, if any, by the survivors (primarily what your spouse will earn until he/she retires).

Estimates of the surviving spouse's future social security and pension benefits are also needed.

Any  shortage  (future  expenses  less future income) equals the amount of life insurance needed.  Subtracting your existing life insurance from this shortage gives you the amount of additional life insurance that should be purchased.

It might make sense to insure the lives of both spouses, even if one of you is a stay-at-home mom or dad.  Consider the costs of babysitting, daycare, and after-school care should the stay-at-home spouse die.

Sound complicated?  It can be, and if you do not feel comfortable calculating your life insurance needs yourself, consider working with a qualified financial planner such as Mentor Capital.

Next month's newsletter will include a discussion of what type(s) of  life insurance might be appropriate for you.