The purpose of life insurance is simple – to ensure loved ones have the fundamental financial support they need after the passing of a spouse or parent. As we celebrate #LifeInsuranceAwarenessMonth, this is a perfect time to be sure your family is protected for years to come. And this often leads to one key question: how much is enough?
Many industry leaders suggest the rule of 10: purchase a policy that is 10 times your current income. While this provides a basic approach, a more comprehensive strategy is to consider four key categories when purchasing life insurance.
In the days and weeks that follow the death of a loved one, family and friends are often left numb and unprepared for the emotional and financial shock of planning a funeral. According to the National Funeral Directors Association, the average cost of a funeral in 2021 was at least $7,000.
When unprepared, this can be an expense most people are ill-equipped to manage. That’s why it is important to include it in an estimated life insurance policy, loved ones can focus on celebrating a life and not worrying about the cost.
With the loss of one income, every-day living costs can become a challenge. To determine an amount, calculate common expenses like rent or mortgage, car payment(s), and utilities. Be sure to include groceries, pet care, and cell phone expenses.
Make a list of these monthly expenses, then tally them to create an annual expense cost. Multiple by the number of years your family will need support to determine your “expenses” costs.
This calculation is straight-forward. If you have young children, what is the cost of day care? If they are school age, what are the annual school costs?
If they are in college or college-bound in the next few years, be sure to include those costs as well. The average annual cost for one year of college tuition and fees at a four-year school in 2021 was $19,020. Total costs – including on-campus room and board, books, supplies, and other expenses – was $35,551. That’s an average over four years of $142,204, so be sure to plan accordingly.
When someone dies, their debts are still owed – and, in most cases, are passed on to the survivors. To protect your loved ones from any debts you may have incurred, include those as part of the life insurance calculations.
Debt to consider includes home equity loans, personal loans/lines of credit, credit cards, and student loans. The average American has nearly $90,500 in debt (this amount includes mortgage, as well as the debt listed here), so accounting for this will go a long way to secure your family’s future financial security.
Grief is a hard enough burden for loved ones to bear – fear of financial security doesn’t need to add to the stress.