How Much Insurance Do My Family Need?
Pretty much everyone with a family says at some point “I must have some life insurance”. The problem is usually then trying to figure out how much is the right amount.
The following are generally the questions that need to be considered, and which help to figure out how much is enough.
- How many people depend on your earning capacity? If the answer is "none," you probably don't need life insurance at all.
- How much money would your dependents need for living expenses? One way to determine this amount is to look at the earned income that you bring to your dependents on a regular basis. Work out how long they need to be supported for, and then from that amount, subtract the worth of property they would inherit from you and any amounts that will be available from public sources or other known sources (perhaps reasonably affluent grandparents would provide for your children in case of disaster for example). Also, there is an amount of ongoing household expenses that would stay the same whether you are here or not, and some that would stop if you weren’t here. As a rule of thumb, for a 2 parent family, losing one adult would reduce household expenses by about 15-20%.
- Is there significant debt that needs to be eliminated? If you want to make sure the family home is freehold for example, then allow for the amount of the outstanding mortgage to be paid off in full. (Remember to adjust the living expenses required by the family to take into account “no more mortgage payments”).
- What is your best guess for final expenses? Obviously there is the cost of funeral, which can vary enormously depending on cultural or spiritual factors. It may also be prudent to allow for some medical costs and perhaps a period of totally replacing a partners income while they are adjusting, and perhaps not working.
These questions are the essential ones that help work out basically what you do (or don’t) need in the way of life insurance. As with all aspects of financial planning though, professional advice can certainly help in fine-tuning the actual numbers required or working out some other ways to fund some of these expenses. Give Andrew or Jonathan a call on 07 578 3863 for a chat about your requirements.
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