Forward Bank

If your family depends on your income, having adequate life insurance is crucial to ensure their financial stability after you're gone. Yet, life insurance often remains an overlooked component of personal finance planning. According to a 2023 study by Life Happens and LIMRA, nearly half of Americans lack any life insurance coverage, despite 39% expressing an intention to get coverage within the next year.

The Importance of Life Insurance

Recognizing the importance of life insurance is an essential first step. The next step is to determine the appropriate amount of coverage.

Several factors impact life insurance costs and availability, including age, health, and the type and amount of coverage chosen. Keep in mind that life insurance policies come with certain expenses, such as mortality and administrative fees. Additionally, if you surrender a policy prematurely, you may face surrender charges and potential tax consequences. It’s wise to assess whether you're insurable before incorporating life insurance into your financial strategy. Remember, any guarantees in a policy depend on the issuing company's ability to fulfill its obligations.

Estimating Your Insurance Needs

A common method to estimate life insurance needs is to multiply your annual income by a certain factor. A general guideline suggests coverage between five to ten times your annual income. For a more precise calculation, consider conducting a "Detailed Needs Analysis" (DNA). This approach evaluates a broad range of financial commitments to provide a more accurate estimate of your insurance needs.

Step 1: Identify Needs and Obligations

• Short-Term Needs: Consider immediate expenses, such as funeral costs, final medical bills, and any outstanding debts (like credit cards or personal loans). The amount needed for these expenses will vary depending on your circumstances.

• Long-Term Needs: Determine the cost to maintain your family's standard of living, including expenses for housing, food, clothing, travel, and entertainment. Ask yourself, "What would it cost per year to maintain our current lifestyle?"

• New Obligations: Consider future expenses, such as education costs for children, potential support for aging parents, and other family-related financial obligations. Accounting for these future needs can help you get a clearer picture of your long-term financial requirements.

Step 2: Subtract Current Assets

Next, deduct your available liquid assets—those that can be easily converted to cash without significant loss of value. Typically, real estate and vehicles are not considered liquid since they may take time to sell and might alter your family's living situation if sold.

By subtracting your liquid assets from your total financial needs and obligations, you can get a better idea of the amount of life insurance coverage you may require. While this method provides a good starting point, a more comprehensive review is recommended to fully assess your individual situation.