My new Life Insurance 101 series is designed to demystify life insurance. My goal is to break down what can be difficult to understand concepts and clear up common misconceptions. Today I’m going to talk about how much life insurance coverage you need.
Funeral Expenses
At a minimum, I recommend that everyone have enough coverage to pay for their funeral. In 2022, the average funeral cost was around $9,600. In 2023, the cost is expected to stay between $10,500 to $15,000 (Adjusted based on inflation rate.) For people on a fixed income and where finances are tight, this is a good start to protect your family from unplanned expenses. If your beneficiaries will need to travel, that cost should be added as well.
Debts
Next we’ll look at professionals and young families. Paying for your funeral, while helpful, usually isn’t enough for your needs. Here we want to look at large debts like a mortgage or business loan. Often a surviving spouse cannot afford that large expense alone and you can help remove the worry of losing your home or business by getting enough coverage to pay off those big debts.
College
If you have children, you will want to include college expenses as well. In 2022 the average cost of attendance for a student living on campus at a public 4-year in-state institution is $25,707 per year or $102,828 over 4 years. Out-of-state students pay $44,014 per year or $176,056 over 4 years. When figuring out the total cost, you may want to account for postgraduate education to become a doctor or a lawyer. The top schools, such as the Ivy League, can cost even more.
Salary
I also recommend you add on an amount equal to a minimum of two years of your salary. If your spouse doesn’t work, this is crucial to allow them time to prepare to support a household alone. If they do work, they may need time to recover from their grief. In the U.S., if an employer gives any paid time off for a death in the family, it is often only 3 days. Your life insurance can provide time for your family to heal without the worries of returning to work immediately. Your family can also maintain the lifestyle you have built together.
Taxes
Next you want to make sure that any estate taxes are covered. Life insurance benefit is tax free and will arrive more quickly than selling assets such as real estate and investments. To estimate what your estate taxes may be, speak to your financial planner or tax consultant.
Equitable Estate
If you have large assets that are difficult to divide such as real estate, valuable art, or jewelry, you can use life insurance to off-set the difference for an equitable division of your estate. This can help avoid family conflicts and disputes.
Other Considerations
Finally, if your budget allows, some other things to consider are cost of assistance for an aging parent, donations to charities close to your heart, securing your legacy, and even establishing life-long care for a beloved pet. Something that may decrease how much coverage you need is any existing policies you may have, such as through your employer.
Summary
Doing this math can feel overwhelming, so I’ve created a calculator that can immediately tell you how much coverage you may need. Contact me for your free personalized analysis and quote for your budget and goals.
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