Life insurance replaces your income in case of an early demise. It provides protection to a spouse, children, or other dependents. Often it is challenging determining how much life insurance is sufficient for your unique needs. Here are four tips to help you overcome this challenge:
Tip #1: Forecast Your Critical Needs
You can do so by reflecting on the following questions: Are your kids currently attending college or will they do so in the future? If you answer yes, you need to assess how much that is likely to cost as well as create a payment plan.
Tip # 2: Alternative Income Stream
Though specific circumstances vary, identifying a source of alternative income is important. Typically, families find it necessary replacing 60% of its gross revenue. For example, replacing$75,000 requires an income stream of $45,000 per year.
Tip # 3: Leverage Shortfalls
Assume that your dependents require $45,000 to replace your income. With returns pegged at 5%, your life insurance plan amounts to $900,000 after 20 years. Even so, this figure doesn’t include college or medical expenses.
Tip # 4: Evaluate Your Current Assets
Knowing your dependents needs helps in assessing your current savings plan. Let’s say their needs amount to $1 million and you presently have $350,000 in assets, you need to raise $650,000 through savings.