Calculating the Costs of Life Insurance: What Your Payout Needs to Cover

July 09, 2019

Is life insurance a topic you like to spend your days thinking about? Almost certainly not. But nonetheless, it's a sensible precaution that will make things a little easier for your family if tragedy strikes.

And although it's a delicate subject, it's important to get your coverage right. Too little insurance is almost as bad as none at all, as it would still leave your family in a difficult financial situation on top of their other worries.

So when you're deciding how much life insurance you need, what factors should you consider? Here are the main items that an adequate policy will need to cover.

Income Replacement
If you're the breadwinner for your family, the most urgent need will be to provide an income if you're gone. You can arrange your policy to provide either monthly payments, a lump sum, or a mixture of the two, depending on your needs. Either allow enough for a direct replacement of your current income, or add a little extra to provide a cushion against inflation.

Clear Debts
You'll also want to clear all your debts to reduce your family's worries as they adjust to their new circumstances. The most important debt to clear is your mortgage, so that your family can remain in your home without worry.

But it's also sensible to include enough coverage to clear your credit cards, loans, and any other kind of debt, wiping the slate clean.

Rent Payments
However, if you currently rent your home, you also need to add future rent payments to your total. At a minimum, allow at least one year's worth of payments to give your family time to plan. Ideally, calculate how much it would take for your family to stay in their home for several years into the future.

Looking After Children
If you have children, you'll want to make sure their education is covered. Calculate how much they'll need to see them comfortably through school, and add this amount to your coverage.

Also consider providing a little extra to help them with their first car, a deposit for their first home, or even the arrival of children of their own.

Elderly Parents
And if you have elderly parents, you may wish to include an element of extra coverage for them. From ongoing medical costs to in-home care, it's important to plan for your aged relatives if you're no longer around to handle things from day to day.

Domestic Costs
However, it's not only the breadwinner who can benefit from a good life insurance policy. Stay-at-home parents make a vital contribution to the smooth running of a home, and the real-world costs of this need to be considered as part of a joint policy. Who would look after childcare and household duties while the breadwinner is at work?

Income During Retirement
Life insurance can help provide a surviving spouse create a guaranteed source of income in retirement, enabling them to maintain their preferred lifestyle in retirement.

Funeral Costs
Lastly, with an average funeral costing between $8,000 and $10,000, it makes sense to ensure this cost won't fall onto your family if the worst happens. Almost all funeral homes will accept delayed payment arrangements if the family can show a valid life insurance policy. This removes at least one worry at an already difficult time.

Life insurance isn't a subject most people like to think about too deeply. However, a generous enough policy could provide one last loving gift from you to your family, at a time when they'd need it most.