The mortgage, car payments, utilities, groceries and gas ... these everyday expenses seem to cost us more every year.
Nowadays many households need two incomes to cover their main expenses. Ideally, you also have some left over to tuck away in an emergency fund and save for things such as retirement and college.
But what if tomorrow your family lost your paycheck? Would your family be able to make ends meet if you that income stream was no longer part of your budget?
The importance of income replacement
Some people may not realize the immediate financial benefits that a life insurance policy can bring to a family when a loved one dies and a regular stream of income ends.
Income replacement can make up the largest portion of your life insurance policy.
Do the math
How much annual income would your loved ones need to maintain their lifestyle if you died tomorrow?
1. Use a life insurance calculator to estimate how much coverage you'll need to replace your income.
2. Add to this figure final expenses such as funeral, burial, and outstanding medical bills.
3. Add up your total debt including mortgage, car loans, credit card, and student loans.
4. Factor in ongoing living expenses such as:
- Child care
- Health care and insurance
5. Add in long-term financial needs such as college tuition and room and board.
6. As a final step, subtract your debt and estimated living expenses from your current savings such as your 401(k) and investments to estimate how much life insurance coverage you may need.
Keep in mind there isn't a standard formula: What works for one may not work for another. For instance, someone with older dependents may not need to calculate as many years of income replacement as someone with young dependents.
However, it could be a starting point to help you determine how much life insurance coverage you would need to replace your income and pay off your debts and final expenses.
The important thing to remember: Consider both your immediate and future needs. You can pencil these figures out yourself, or try using the Protective Insurance Calculator.