If a stranger on the street were to ask you, "How much are you worth?" you'd probably answer with an offended, "I'm priceless, of course!" But believe it or not, it is important to put a price-tag on your life, at least for insurance purposes. If you take the time to crunch the numbers and consider how much your family depends on you, you may realize you're worth a whole lot more (or maybe a little less) than you thought. This process will help you determine just how much life insurance you need to keep your family covered. Here are a few things to keep in mind as you figure out just how much you're worth and how much life insurance you should buy.
Congratulations. You're a Millionaire!
Here's a surprise: most people earn more than $1 million throughout their lifetime. As you look at your meager pay-check, you may find that hard to believe. Think of it this way: even if you earn $50,000 a year, you'll make $1 million within the next 20 years.
So, why don't you feel like a millionaire? If you were truly that wealthy, shouldn't you be jet-setting around the world, sipping Cristal and living in a mansion that's featured in the next episode of MTV's Cribs? You probably don't feel like you're rolling in the dough because this $1 million worth of income is spread out over your lifetime. Plus, most of the cash you earn goes toward supporting your family and paying day-to-day expenses, like groceries, the mortgage and utility bills.
However, if (heaven forbid) something were to happen to you, your income stream would suddenly dry up. What would your family do without the cash they need to pay the bills, buy necessities and save up for the kids' college funds? This is why it's to make you have enough life insurance to cover all of your family's needs. After all, you're a millionaire. So, step it up a notch.
And the Actual Retail Price is …
So, how do you figure out just how much money you're worth to your family? First and foremost, look at how much income you bring home each month. Then, you can buy a life insurance policy that will pay your family a monthly income that is comparable to what you currently earn.
For example, if you buy a term life insurance policy that's worth $500,000, your family would receive a monthly payment of about $4,787 for the next 10 years. If you don't think that will cut it, you'll need to purchase a policy with a higher face amount. Maybe you'd like your family to receive a higher monthly payment or perhaps you'd prefer to keep them covered for the next 20 years. If that's the case, it's time to beef up your life insurance coverage.
But Wait - You're Worth So Much More
You may be thinking, "Wow, it's incredibly easy to figure out how much life insurance I need!" Well, you should know by now that nothing in the investment world is quite as simple as it seems.
Figuring out how much life insurance you need isn't as easy as calculating your monthly income. In addition to replacing your income, you'll need to think about other expenses your family may face if you were to die today. For example, they may have to pay medical bills, hospital expenses, funeral arrangements and attorney fees. They'll also have to pay off any outstanding debts you may have as well as loans and taxes.
On top of that, you should think about your family's long-term expenses. Not only will your family be left to pay the mortgage and other monthly bills, but what if your wife wants to buy little Sammy a car when he turns 16? And don't forget about college tuition and wedding expenses. If your daughter has been planning her wedding day since she was four, she may expect an elaborate and costly event when the day comes.
Of course, you may not be the only person in the family who brings home the bacon. If that's the case, be sure to factor in other sources of family income. This may include your spouse's salary, your investments, rental property profits and any Social Security survivor's benefits to which your spouse might be entitled. Plus, don't forget to throw in the cost of inflation. Things become more expensive every year, so today's $5,000 may not be worth diddly-squat 15 years from now. (To learn more, read our Inflation Tutorial.)
Finding the Magic Number
Obviously, each family's life insurance needs vary significantly. It all comes down to your income, your short-term and long-term expenses and your goals for your family. Of course, finding the "magic number" is easier said than done because it's a precarious balancing act.
The goal is to purchase enough life insurance to safeguard your family without breaking your budget. If you want to pinpoint just how much life insurance you need to protect your family, meet with a financial advisor or an insurance agent. A professional can help you determine how much you're worth and how much life insurance you can realistically afford. (For further reading on life insurance, check out our related articles: 5 Mistakes That Can Ruin Your Life (Insurance) and How Much Life Insurance Should You Carry?)