When determining how much life insurance you need, one important consideration to keep in mind is what’s called your “human life value.” This is, in essence, your financial value to those you love. While you can never, certainly, put a financial number on your true worth to your family, you can calculate what your future financial contributions to your family will be.
Knowing your human life value is important when purchasing life insurance because you want to have an accurate idea of what your family will need when you are gone and, as such, no longer able to contribute financially to the household. The calculation is made based on a number of factors including your occupation, income, benefits you get from your employer, etc. (For more information on the inputs used, visit the LIFE Foundation’s Human Life Value Calculator.)
Age is also a critical factor in determining your human life value. Let’s compare two scenarios. A 45-year-old man seeking coverage would have his income multiplied by 14-20 times when determining a policy amount, while a 70-year-old man would only have his income multiplied by 4-10. You see, life insurance exists to essentially replace your financial support for a set amount of time, to care for loved ones in need after you die.
And above all else, you want to avoid being underinsured, otherwise your family may still be in financial trouble after you pass away, even if you do have a life insurance policy.
Neil Jesani, CEO of BeamaLife, is a Certified Financial Planner and was heralded by the Consumers’ Research Council of America as one of “America’s Top Financial Planners.” He blogs about life insurance and other financial topics at Personal Finance Principles.