Do You Have Too Much Term Life Insurance?

How Much Life Insurance Does a Person Really Need?

If you have family members that depend on you and your income than you need life insurance. The question is: How much? Well you might be surprised to know that many people have too much. Insurance agents are salesman. It’s a fact that when you buy more life insurance, they make more money. Because of this, millions of people are walking around paying for more than they need. Term life insurance, unlike whole life insurance, has a time limit and therefore may never be used. Because of this, there is no point in paying more than what you have to. So, grab a pen and paper… and you’ll probably want a calculator… and figure out what you actually need.

Let’s start with your expenses.

First start with the surviving spouse’s annual living expenses. This will include mortgage payments, car payments, monthly bills and food for a whole year.

Now multiply that by the number of years it would be needed. (This is subjective and can be difficult to determine, but base it on how much you can afford now in insurance payments).

This total gives you Expense A.

Now determine your childrens’ annual living expenses. This will include things like food, clothes, and child care (Keep in mind that more child care may be needed after you are gone).

Now multiply that by the number of years it would be needed.
This is Expense B.

Next, calculate yearly education expenses. In 2008, the average four year degree from a private school cost $34,000 per year, while a public, in state school was approximately $14,000 per year. You may also want to include additional expenses for school aged children and remember that these costs go up about 5% every year.
Now multiply by the number of years it would be needed.
This is Expense C

Funeral & Estate Settlement Expenses. The average funeral cost is roughly between $6,000-$10,000 and depending on the nature of your estate, you should talk to an attorney to get the best estimate).
This is Expense D

Almost done…
Now add up any debts you’d like to be paid in full by your life insurance policy. This could be credit cards, medical bills, loans etc. (Things like mortgages and cars should be included in the remaining spouse’s yearly expense).
This is Expense E

And finally, your contingency fund. A contigency fund is optional and is approximately three times the amount of your monthly expenses. It could also be extra money for retirement, or just to enhance your loved ones lifestyle after you’re gone.)
This is Expense F.

Now add up your expenses A thru F for your Final Expenses.

Moving on to your expenses….
Add up your surviving spouses after-tax income. If they’re unemployed, you can enter zero, but realize that they will most likely need to work eventually. You can estimate a modest income based on their skill level and experience).
This is Asset A.

Add yearly social security benefits.
This is Asset B

Add up your current assets available. This could be cars, valuables, second homes etc.
This is Asset C.

And last, but not least…. Add any existing life insurance. Consider what you’re employer offers as well as any extra you may have purchased.
This is Asset D.

Now add up Assets A thru D to get your total Final Assets.

Time for a simple math equation.
Final Expenses - Final Assets = The amount of life insurance needed.

Keep in mind this is only an estimate… a starting off point. It’s always best to consult an certified insurance agent when buying your plan but at least you’re prepared and you have a realistic number in mind.