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How Much Life Insurance Do You Really Need?

How Much Life Insurance Do You Really Need?

| October 04, 2018
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The golden rule for whether you need life insurance or not is fairly straightforward. If someone depends on you financially, you should have a policy in place. Not only do many people not have a life insurance policy, but many that are considering this kind of insurance haven’t done so simply because they aren’t sure of how much life insurance they really need.

Insurance companies are going to use a variety of advanced mathematics, algorithms, and access to demographic data to figure out just how much you should be paying for life insurance. Carriers will also determine how likely you are to take advantage of it at any point in time, which makes estimating how much life insurance you need easier than you thought. Match Point Financial can help you make informed choices with your money.

Estimating Income
As a rule of thumb, you’ll want to conservatively estimate the amount of yearly income that a lump-sum payout from your life insurance could yield for the people that depend on you. Most people go with a 4% yearly income from the lump sum, as Americans can expect a 7% return on their investments on average over the long run. This allows you to pull out 4% every year while keeping up with inflation, never really having to touch the principle of your lump-sum payout. Those depending on you financially can then have fewer money concerns over their lifetime.

Going with a life insurance payout of $1 million will produce roughly 40% of the annual income for the rest of your family’s or beneficiary’s lifetime needs. If you’d like to set up your loved ones financially with the help of a life insurance policy, you’ll want to multiply the amount of annual income you want to leave behind by a factor of 25.

Estimating Life Insurance Payout
If you want to ensure that your partner can lead a comfortable life with $100,000 of steady, reliable income every year from your life insurance payout, you’ll want to multiply that factor by 25, which equates to $2.5 million. That’s going to be the total amount of money you need your life insurance to pay out, assuming you have no extra savings.

If you do have savings, let’s say you were savvy and already have $1 million put away. You’d only need a life insurance policy that covers the remaining $1.5 million to give your loved one that steady $100,000 of annual income they’ll need after you’re gone.

Other Life Insurance Considerations
Of course, you’ll also want to consider details such as:

  • Will the beneficiaries of your life insurance policy be able to generate income on their own after you’re gone? This will always help bring down the total amount of life insurance you really need.
  • How long will your beneficiaries need to depend on your life insurance payout? It’s impossible to know for sure when we’ll pass away, but it’s not a bad idea to plan. Figuring out how long you want your life insurance to provide your loved ones with a steady income will help them in a great time of financial need. And at Match Point Financial, we’ll help you pursue this financial goal.
  • Leave a little bit extra. After you’ve determined the amount of money you’d like your beneficiaries to have each year and the amount of money your policy needs to pay out to produce that figure, you’ll want to add a little extra on top of that final amount. This guarantees that your loved ones are protected no matter what happens in the future. It’s better to be safe than sorry when it comes to insuring the lives of family.

To learn more, contact me by calling 352-207-8014 or sending a message here.

About Chris
Chris Reed is the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and forming his own independent firm in 2010.

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