How to Calculate Your Coverage Amount
A few of the primary reasons you may be interested in purchasing life insurance are to cover your lost income, outstanding debts, and burial costs. If you're ready to figure out how much coverage may be right for you, you can use Ethos’ term life insurance calculator to help you estimate your needs.
Still deciding what life insurance coverage amount might be right for you? Consider the following:
1. Future Earnings
Replacement income can be essential for your dependents if you suddenly pass away while your coverage is in force. A rough estimate for the coverage you'll need is the amount of income you would have earned to support your dependents during your income-earning years. Experts recommend that you have insurance to cover at least ten years of your annual income.
When considering the needs of your dependents, you may decide to apply for coverage that will be in force until your kids are out of the house. You may also opt for a term that lasts until your mortgage has been paid off, or until your retirement goals have been reached. Whatever your family’s needs are, you may decide to plan for insurance coverage during your income-earning years to protect your future earnings.
Debts held jointly, or with a cosigner, will become the sole responsibility of the living party - regardless of their ability to pay. For that reason, it’s important to ensure that your life insurance policy can pay off any outstanding debts. When planning the amount of your life insurance policy, be sure to include your mortgage, credit card balances, car loans, personal loans, student loans, and any other bills you may have. The key here is to be transparent about your personal and jointly-held obligations, well before the unexpected happens.
Passing away without a plan for your financial obligations can be devastating. Your heirs may be responsible for your debts or may have to face creditors and collectors to cover your unpaid financial obligations.
3. Funeral And Burial Costs
Funerals don’t come cheap these days with the median cost in 2018 being more than $8,500. This amount only covers basic burial expenses, such as the funeral home’s services, the cemetery, and the grave marker or headstone. If your family doesn’t have several thousand dollars saved to spend on a funeral, you may want to increase the amount of your life insurance coverage to cover these expenses.
4. Other Expenses
Life insurance can be a critical part of your financial planning as you go through major life changes. When your baby is born or adopted, when you marry or divorce, you may want to evaluate your life insurance coverage needs.
5. Stay-At-Home Parents
Are you a stay-at-home parent? Would your surviving spouse need to hire a nanny or babysitter to watch over your children while you work? Would they need a housekeeper and other maintenance workers to keep your home in order? While you can’t predict the timing of your death, it is possible to help reduce stress during an already difficult time by providing for your family at the time of your death by having life insurance coverage in place.
6. Life Insurance For Children
You might be wondering if you should also purchase policies for your children. In general, purchasing life insurance policies for healthy kids is inexpensive. Since children don’t typically contribute to the income of a household, there may not be a need to purchase life insurance for any amount above their funeral and burial costs.
Only parents with experience can fully understand the strain the loss of a child can place on the surviving family. In these unfortunate situations, life insurance can provide additional financial support while the family grieves and learns to cope with their loss.
7. Increasing the Amount of Your Life Insurance Coverage
As your family’s goals and your financial situation changes, you may find yourself considering increasing the amount of your life insurance. For example, you may have recently gotten married, purchased a new home, set up a college fund for your child, or even started a new business. As you become more successful, you’ll have more to protect, should you or your partner suddenly pass away.
If you decide to increase or add to your current amount of life insurance coverage, the insurance company may ask you for current information regarding your occupation and health condition using an application for an increase or an additional policy. This process will help the insurance company determine the price and the amount of coverage that you qualify for at the time you apply.
8. How to get a quote
Now that you’ve learned how to determine the amount of life insurance you may need, you might be interested in learning how to get a quote that fits your family’s needs and budget. The coverage amount you apply for will be based on your calculations regarding the amount of income that would need to be replaced, your current or planned outstanding debts, and how much money your loved ones would likely need available to them in the event of your death. You may also want to include costs to cover your funeral and burial arrangements as a courtesy to your family and friends. The amount of life insurance you purchase is a very personal decision, but taking the time to consider it carefully can be an act of loving kindness.