A term life insurance plan is a good way to provide peace-of-mind, knowing that your loved ones will have the income they need to maintain their current standard of living if you die. Losing a spouse or parent is hard enough without financial concerns during this difficult time.
To determine exactly how much term life insurance coverage you’ll need, follow these steps.
- Discuss your burial wishes with your loved one and estimate funeral expenses, typically between $5,000 and $15,000.
- Calculate your debt, including your mortgage. Your family will be able to live on less if they can pay off all outstanding debt in one lump sum from your life insurance settlement.
- Include college education for your children. Estimate college costs to rise by about 5 percent per year. If your child intends to work to pay for part of school, you may get away with slightly less.
- In most cases, you won’t need to replace 100 percent of your income, especially if your spouse works as well and you’re already paying for childcare. Instead, estimate amounts totaling 50 percent of your pre-tax earnings until your retirement.
- Subtract income from other sources to get a final term life insurance coverage estimate. Any investments you have that your spouse can tap into (not counting retirement accounts) can help defray life insurance costs.
You’ll want to reassess your term life insurance coverage requirements over time, as your debt drops, your salary rises, or if your family or living conditions change. Look for a flexible policy that permits you to change the amount of coverage over time.