The purpose of life insurance is to allow your family members to pay the bills and live their lives as planned despite your absence. That’s why some experts and most online calculators sponsored by the insurance industry seek to figure the chunk of investment capital it would take to replace all of your income for 20 years or longer, held securely in Treasury or municipal bonds and certificates of deposit. With savings yields low and the prospect of longer life expectancies in retirement, this approach tends to aim high, especially if you assume raises and promotions. 

Instead, consider a simple strategy to calculate how much coverage to buy and form a plan that’s easy to update. The idea is to assess whether you need extra coverage or different policies only after you project your life-insurance needs using the following categories:

• Final expenses. A funeral, burial and related expenses tend to cost $10,000 to $15,000. Your beneficiaries may be able to get the tax-free proceeds from insurance faster than if they waited for money from your estate.  
• Mortgages and other debts. Total your mortgage balance, car loans, student loans and any other debts that would be a heavy burden on your survivors. They may choose not to pay off the mortgage, especially if the interest rate is low, but the money should be available so that they won’t face the prospect of being forced to sell.
• Education expenses. This can be tricky because you need to consider the cost of college at the time your kids enroll. College costs have been rising by about 5% a year, which is the same rate that life-insurance proceeds are expected to grow over time. Look up the current cost for the college you’re considering, deciding whether you want the insurance to cover all or a portion of the tab, and adding the amount in today’s dollars to your life-insurance calculation.
• Income replacement. Once you cover funeral expenses, debts and education, your family won’t need to replace 100% of your income -- and that’s where the art part of the calculation comes in. Legacy Insurance Advisors recommends covering 50% of current pretax earnings until retirement. For example, if you earn $100,000, divide $50,000 by 0.05, which works out to $1 million. That assumes the insurance benefits will earn 5% a year over the long haul, a conservative back-of-the-envelope figure.

If you're ready to put your life insurance plan into action contact Legacy Insurance Advisors for a customized quote today.