This is one of several methods you can use to help figure out how much life insurance you should buy. Use this method if the main goal of your life insurance purchase is to cover your family's immediate and ongoing expenses after you pass away. To use this method, you divide your family's needs into two categories:
- Immediate (cash needs)
- Ongoing (net income needs)
Immediate Needs
Your family's immediate needs require cash to cover the following types of costs:
- Final medical treatment costs
- Funeral and burial costs
- Estate settlement costs (e.g., probate costs, attorney's fees, estate taxes, inheritance taxes)
- Costs of settling credit card and other debts (auto loans, student loans, etc.)
- Emergency fund for unexpected costs
- Establishment of college education expenses fund
Ongoing Needs
Your family's ongoing needs (e.g., food, clothing, shelter, and transportation) require a continuing source of income to meet their expenses. The amount of income that needs to come from life insurance equals the dollar value of these needs, minus the amount of other expected sources of income, such as:
- Social Security survivor benefits
- Spouse's wages
- Employee pension plans
Subtract Your Available Assets
If you have other assets that might be able to offset your family's ongoing needs, subtract them from the total dollar value of life insurance you think you need. Here are some examples of these types of assets:
- Bank accounts
- Savings bonds
- Real estate
- IRAs, 401(k)s, pension, profit-sharing plans, etc.
- Group life insurance through an employer or association membership
- Existing personal life insurance policies
- Investment assets (e.g., mutual funds, stocks, bonds)
The difference represents your family's needs that life insurance — and the future investment of the proceeds — must cover.
To see why this is such an important decision, check out the video below. It tells the real-life story of a family that will be forever grateful they took the time to prepare: