Many people treat life insurance as a “file it and forget it” decision, but needs change over time. It it could be time to go through a comprehensive review. Key steps include:
1. Project major expenses. Will you have children going to college in the future? If so, how much is that likely to cost and how will it be paid for?
2. Decide how much of your income you want to replace. Although circumstances will differ, many families find a need to replace 60 percent of an individual’s gross earnings. To replace a $75,000 income, for example, $45,000 per year might be required.
3. Capitalize the shortfall. Suppose that your survivors would need that $45,000 in annual income to replace your earnings. If you believe that investment returns of 5 percent are likely, multiply by 20—you’d need $900,000 of life insurance, in that case.
4. Consider current savings. Once you have tallied all the funds you’d like to leave behind after your death, you can see how much you’ve already saved. For example, if the needs total $1 million and you already have $250,000 in savings, you might want to have $750,000 in life insurance.
5. Don’t forget special needs. The above analysis pertains to ongoing living expenses. What about major expenses such as college education expenses? How will they be financed?