If you have never purchased life insurance or if it has been a while since you bought your policy then you may be under-insured. Use these tips to help calculate your life insurance needs.
Plan ahead for life-changing events: Marriage, retirement, childbirth, starting a business or even buying a home can alter the amount of life insurance required to care for your family. Make a point of reviewing your life insurance needs at least once per year.
Define your goals: Depending upon your life stage, the purpose of life insurance may be to replace a lost income or supplement a retirement pension and health benefits. Whatever the main financial goal may be, include the actual annual amount plus benefits and intangibles such as health insurance, care-taking and help with household duties. Remember, it will be necessary to pay someone else to perform those same duties in the event of an untimely death.
Add Inflation: After you have derived an estimate of the total base benefit amount, include anticipated rates of inflation. Don’t use the average government inflation rate, especially for college or health care expenditures which tend to rise far above those of other goods.
Draw-Down Period: Ideally the “perfect” amount is one that allows your family to use a combination of interest on the funds plus principle until the amount is exhausted.
Taxes: Depending upon how the life insurance is purchased and held, some portions may be taxable.