Calculating a Suitable Life Insurance Coverage Amount to Ensure Your Family's Security
Taking out a life insurance policy is a sensible and loving way of ensuring your family is taken care of should the worst happen to you, but how much coverage should you take out? This depends on balancing two competing requirements: how much you want the policy to pay out if needed, but also how you much you can afford for your monthly premiums.
In trying to lower the costs you might accept fewer benefits, but that can defeat the entire point if the coverage is not up to requirements if a claim needs to be made. Here are the basics you need to take into account when calculating how much life insurance to take out to protect your family if you're no longer around.
Clear Your Mortgage
If your main concern is paying off your mortgage so that your family is not faced with unaffordable housing bills, then a specific mortgage insurance policy may be appropriate. This will clear any outstanding loan without paying any further benefits and may be a less expensive option than general life insurance, particularly if taken out as part of your home loan package.
Remember that you'll need enough coverage to pay off both the principal and interest, so ask your mortgage provider for a full settlement figure including any early repayment penalties. While this figure will of course fall over time as you continue your repayments, it's better to start off fully covered to ensure there's no shortfall for your family to make up.
Clear Other Debts
From credit cards to home equity loans, your other borrowings are also prime candidates to be covered by insurance so that you don't leave your family with a financial mountain to climb. Although personal debts can't be transferred to your surviving dependents, they can be claimed from your estate, reducing the size of your legacy and possibly even forcing a family home sale. Making proper provision in your life insurance coverage will remove this burden and risk.
Providing for Childcare
If you have children, you'll need to think about whether childcare costs will need paying if you're not around. Your surviving partner may still need to earn an income, but this can be complicated if the family includes younger children. Consider including extra coverage on your policy to pay full- or part-time childcare for the remaining years it'll be needed - this amount can always be removed from your policy later when it's no longer necessary.
Like many parents, you may have a savings plan in place to help your children through education some years in the future. If your death means family income is drastically reduced, it may not be possible to keep to this plan, so it needs to be replaced as part of your life insurance payout. Factor in school fees, living expenses, and even some spare cash to provide an income to make their passage through school a little more comfortable.
Although life insurance is usually thought of as providing a lump sum payout, it's worth considering setting up an option to replace your income on a monthly basis. This will allow your dependents to keep up their current living standards, at least temporarily. It's not necessary to provide a lifetime's worth of income replacement, but enough to smooth the transition and help ease the burden at a difficult time.
As with all matters concerning insurance, things can get very complicated very quickly when trying to satisfy all these requirements, and there are many different ways of putting together the coverage you need. If in doubt, ask a broker for help - the cost is well worth it for the peace of mind you'll gain, knowing you've got proper protection in place so that your family will be cared for when they need it most.
About the author: Seth Gowdy is the Sales Manager for Pivot Insurance and holds multiple insurance and securities' licenses. He has been part of the financial services industry for nearly 20 years. In his free time he enjoys being outdoors fishing, hiking, and geocaching with his wife and two children. Seth most enjoys helping clients with Pivot’s customized process and needs' calculators. You can reach Seth at 1-800-651-1953 or firstname.lastname@example.org.
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