Life Insurance Need Analysis





You need life insurance! It’s crucial that you understand the financial needs of your beneficiaries before you select a policy. Many individuals tend to think in reverse when it comes to life insurance. They make critical decisions on the product they want, whether it’s permanent life insurance, basic term life insurance or even a combination of both, before thinking through the amount of protection they need. As such, you must first figure out how much life insurance you need before you think about the solution that would be most appropriate. A needs analysis can help you determine how much life insurance you should buy.

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Consider Current and Future Expenses

A good needs analysis will consider immediate, ongoing, and future expenses. Immediate expenses comprise the total cost of a funeral and any outstanding medical bills. Instead of purchasing life insurance exclusively to replace income, individuals should consider whether they want their policy to pay off debts. Typically, people want their families to be positioned to pay for expenses when they die.

Ongoing and future expenses, on the other hand, may include funding for college. The more detailed you are about the cost of college, the better.

How long will your family would need support? Multiply your annual income by that figure. The multiplier, will be the total number of years it would take before your youngest child completes high school. Instead of planning life insurance as an isolated effort, consider buying it as part of an overall financial plan. Once this information is known, you can map the life insurance need on top of the plan. Don’t forget, the death benefit from life insurance is TAX FREE.

What You’re Worth to Your Family

To help determine the amount of life insurance to purchase, consider looking at your lifetime economic value. The formula is based on your answers to the following questions.

  • How old are you?
  • How much do you pay in taxes?
  • How much do you earn before taxes?
  • At what age are you planning to retire?
  • What’s the value per year of the chores you do such as mowing the lawn, chauffeuring kids, or whatever role that your survivors would have to pay someone else to do?
  • How much do you receive in employee benefits, such as contributions to retirement savings?
  • How much will your family need for things like clothing, food, and transportation?

Also, a good needs analysis considers how much income the death benefit from the life insurance policy is likely to bring once invested. How much life insurance to purchase should be determined by your family’s life style following your death. You might be gone physically and emotionally, but with proper planning, you will always be present financially.

Don’t Underestimate Need

Most individuals underestimate the amount of life insurance they should purchase. For instance, if you received a salary of $4 million upfront, you’d look at that money differently and you’d protect it differently. Many are able to earn more than $4 million over the course of their career, but a higher percentage of this group doesn’t think in those terms when buying life insurance.
Don’t skimp. Purchase a little more coverage than you think you’ll need instead of purchasing less. Keep in mind that your income will most likely increase over the years and so will expenses. While it’s hard to pinpoint how much things will increase over the years precisely, a cushion helps ensure your family members can maintain their lifestyle. To ensure that you don’t leave your family members with too little money to live on, it would be advisable to consider taking a comprehensive review of your family’s needs. A family meeting would be advisable.

What’s Your Best Number?

Needs Formula

You can use the general formula that involves taking your financial obligations and subtracting liquid assets to calculate your target amount.

  1. Calculate obligations = Annual salary + mortgage balance + other debts + future needs like college and funeral costs.
  2. Then, subtract liquid assets such as existing college funds, savings, and current life insurance.

What Are Your Options?

Life insurance is a big decision and you need to be careful when making your choice to ensure that your family is left with enough. Retirement Planning Solutions provides attractive and competitively priced life insurance programs*.

Use our coverage calculator to estimate how much life insurance you need.