Updated: August 2, 2023
What will happen to your family in case of your untimely death? For breadwinners, they will undoubtedly experience financial difficulties. Without a provider, where will they get the money to spend on their daily expenses? It is scary to imagine.
Fortunately, there is life insurance, which can provide the necessary financial protection against such unfortunate circumstances. And it is for this reason that family income earners should have one. It is not just for their family’s welfare but also for their peace of mind.
But how much life insurance do you need?
Some would simply guess a large amount and hope that it is enough. This is a mistake because if your coverage is too small, your family could still face financial difficulties. On the other hand, if your coverage is too large, you’ll spend too much on insurance. Knowing how much coverage you need is essential for a sufficient and cost-effective policy.
Fortunately, there is a simple way to know how much life insurance you require. And all you need to remember is LIFE. As an acronym, L.I.F.E. stands for Loans, Income, Final Expenses, and Education. Below, we’ll go through each of these four letters, calculate the cost of each, and then sum the numbers to determine the adequate coverage you need.
Loans
Some loans are still subject to collection of payments even after the borrower’s death. These include personal loans, credit card debts, and vehicle loans.
When you die, these debts are paid from your estate before they are distributed to your heirs. And if it’s a significant amount, your loved ones could end up with nothing, or worse; they’ll become burdened with paying for them if your assets aren’t enough.
So, calculate your current debt and cover this amount in your policy.
Income
It is essential to provide the daily and monthly needs of your family for the immediate future. It won’t be so easy to replace your income. In addition, they would still need time to process their grief over your loss.
Thus, it’s critical to know how much your household’s necessary expenses are and provide at least 3 years’ worth of that amount. Some would choose 5 years. And still, some would choose 10 years. It’s really up to you and how many years you think your family would need before they could earn sufficient income.
Final Expenses
There are, of course, costs to dying. You don’t simply disappear from Earth.
Your family will need to pay for your medical expenses and hospital bills. And even if you have a pre-need memorial plan, there will still be funeral and burial expenses. Lastly, the inevitable estate tax must be settled to transfer your assets and investments to your family.
Admittedly, this is not as straightforward to calculate as the previous Loans and Income; but it is nevertheless as important, so take your time to arrive at a reasonable estimate.
Education
Finally, you can secure your children’s future and consider their educational needs.
Studies in the U.S. show that 94% of business leaders, successful professionals, and wealthy individuals are college graduates. Moreover, those with degrees earn more than those without, and in general, they have better options in life and more access to opportunities.
Don’t you want that for your children? Indeed, the gift of education is the best legacy you can leave behind.
Get Help
The L.I.F.E. strategy can be confusing. However, you don’t need to do it alone. Talk to a financial advisor today and let them help and guide you in giving your family adequate financial protection against life’s unexpected turns.
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