Term life insurance is one of the types of the life insurance in which the policyholder is covered for a certain time period. That means that the beneficiaries or the nominated relatives of the policyholder will get the payment to meet their expenses if the policyholder dies within the term mentioned in the policy contracts.
Typically, the shortest period for the term contract is 1 year, which means that the death of the policyholder within 1 years’ time will yield monetary compensation for the beneficiaries but even after 1 day beyond the year, no compensation will be paid. However, how much term insurance is required still remains a question.
The following are the major aspects that you will need to evaluate to properly analyze the amount of insurance needed.
Although a tough question but probably the most genuine one, the burial cost is the first expense that your family might have to bear after your death. You should make an estimate of the expected expenses in order to provide them with a way to pay any immediate expenditures associated with the funeral. Typically, the costs of the funeral and other associated aspects amount to $10,000 to $20,000. You’ll have to choose an exact amount to get the closest estimates of your requirements.
The second major expenditure, which will be settled by your family, is related to the debt that you have outstanding. If you have any debts other than the mortgages, you should account for it fully, by calculating the total amount payable.
At this step, you’ll have to decide how much time you will want to help your family in meeting their ongoing expenses. This could be the time of your eldest son graduation from your college, the retirement of your spouse, death of your spouse or any other time that you deem enough for supporting your family after your death. Mostly, people choose the completion of school of the younger child or the death of the spouse as the most secured criteria to determine the number of years to give financial support to the family.
After you have estimated the number of years, you should also consider the amount required each month by your family to cover the existing expenses. You can include your current salary if you save little or no money at the end of the month. However, if you manage to save a significant amount of money each month, then you can subtract the saved amount from the total to estimate the monthly expenditures of the family in the future years. Don’t forget to include the impact of inflation in this calculation.
The third important aspect is dealing with this the mortgage payment. You should calculate the amount of money required to pay off the mortgage on all of your properties so that your spouse or children won’t have to worry about it after your death.
The fourth aspect is the coverage for the education of your children. You’ll probably want your children to attend a university or have enough to pay for an education in the event of death of one of the parents. So, you should account for the education expenses that your children will have to pay for when seeking the higher education. When making this calculation, you must keep this in mind that the cost of education is typically increasing at the rate of 5% annually and your children will have to bear lot more than what is currently being charged by the university. Additionally, if you have more than one child, then the age of their graduation will be different which will effect the cost as well.
Other major expenses:
Have you planned a major renovation to your house or is the purchase of a car in your future plans? You need to include these into your estimates.
After estimating all these aspects, you should simply apply the formula by subtracting your liabilities from your assets and you’ll get the rough estimates of your cash requirements.
When calculating your liabilities, include the income you expect to provide each year and multiply it by the number of years, add mortgages, debt payments, child education expenditures, and all such expenditures, which have been discussed in the above section. In the assets category, you can include the savings, existing funds saved for a college education or any other such asset, which can be converted to cash readily. After subtracting the assets, you’ll reach a total amount that your family will require and you use that amount to determine how much term insurance to buy.
Although the results of these calculations are still not exact because of the involvement of future costs and the lack of actual information about inflation rate and living expenses you will have a good ball-park figure to start with.
Here’s To Your Success – Jody Humphrey