how much life insurance is enough?

By Darrel Richter

When deciding how much life insurance coverage you need, you're giving yourself the opportunity to protect yourself and you beneficiaries for years to come. But if you don't correctly calculate how much money will be needed, you might be defeating the purpose of life insurance.

You can group the financial responsibilities you have at the time of your death into three categories: final costs, income loss, and debts.

The price of funerals and the expenses that go along with them has been on the rise over the past 20 years. And even if you decide not to have a funeral at the time of your death, you still need to consider the costs of disposing of your body. It's a good idea to get a solid estimate of how much your funeral or disposition costs will be. Be sure to write your funeral intentions in a will, so your beneficiaries will know how much of your life insurance money is planned for the funeral.

Also included in the final costs of your death are federal and state death taxes and property taxes. These taxes need to be paid immediately after your death. To calculate these expenses, you first should calculate the total value of your estate. These final taxes for someone with a moderately valued estate typically amount to about 10 percent. If you have a larger amount of property, it will be a bit more than 10 percent of the estate. If you aren't sure where you fall, you will want to ask your attorney for an estimate.

Second, look at how much income your family or beneficiary will be without when you die. This is perhaps the most overlooked cost when considering your financial responsibilities at the time of your death. When determining this amount, the most important step is communicating with your partner. Talk about whether your spouse would be gainfully employed if you should die, whether your spouse would remarry, and how your car or house payments will be taken care of. If your partner will be employed, your financial responsibilities to them will be lower. If your spouse will remarry to another person with a substantial income within a short period of time, you won't need as much money for them. And if you decide to pay off your car loan or mortgage at the time of your death, your partner won't need as much income, either. You should consider each of these issues first when determining the income loss of your family.

Determine how much money per year after your death your family will need. Then determine for how many years that amount of money will be needed. Multiply these two figures, factor in an appropriate interest rate for inflation, and you've arrived at the amount of income your beneficiary will have lost after your death.

The third consideration is the amount of debt that you will have at the time of your death. When you die, your family will become responsible for paying those obligations. This category is simple to calculate once you've determined what should be included. Tally up all your credit card accounts, short-term loans, and installment payment obligations. These are payments that you likely don't want to be passed on to your family.

You may decide that other loans, like car notes and mortgage payments, should fall under this category instead of considering it a long-term income need. Including it as a debt that you want paid off at the time of your death may increase the amount of coverage you need substantially, but your family wouldn't inherit those monthly payments.

The final consideration you should entertain is how much money would be needed right now, if you should die tomorrow. Keep in mind that these costs may be above and beyond what you've already calculated. Have you already paid for your children's college education? Are there other immediate costs your family will have that you may not have in 10 or 20 years?

Also, keep in mind that your present salary at work may increase or decrease. If you believe you're at your peak income level right now and that in 10 years you won't be earning as much money, you need to consider that the income your family would lose should you die tomorrow will be a greater amount than it may be in 10 or 20 years.

Once you calculate how much life insurance money you will need to protect you and your beneficiaries, you may contact your agent to help determine what amount of coverage is right for you. It's best to be prepared for this step, rather than guessing and leaving your family responsible for debts and an income loss.