GUARDING AGAINST THE FINANCIAL PITFALLS OF DEATH
The three main ways of calculating how much insurance you need are the rule-of-thumb method, human needs approach, and cap- ital preservation approach. The rule-of-thumb method says that your coverage should be about five times your gross income plus your mortgage, debts, funeral expenses, and other funding needs. As long as your situation is pretty normal and you don’t have any outlandish expenses, the rule-of-thumb method should work well for you.
The human needs approach focuses on what your family will need after you are gone. It takes into account your final estate and funeral expenses, estate settlement costs, and the amounts of money needed to pay off your mortgage and other debts. It also factors in the fact that your children will need income until they are of legal age and that your spouse may need income for the rest of his or her life. Any special needs and college costs must also be added to the mix. From that total, any social security or veteran’s benefits should be subtracted. Finally, it is assumed that if your family takes a lump sum and invests it wisely, the principal and income will be enough to pro- vide for their needs.
The capital preservation approach is similar to the human needs approach because it considers all the financial needs of your family. However, with this method, your family’s needs are met with the income earned from your assets. The assets would stay intact for your beneficiaries.
Deciding which method is best for you may be a little time-con- suming, but it’s worth it. (See Table 11.1 for comparison of premi- ums.) Plus, if you have hired a financial advisor, that person is more than capable of helping you decide how much coverage is necessary.