Calculating Life Insurance for Debt
This calculator can be used to estimate the amount of life insurance needed to pay for all outstanding household debts. The calculator needs a total of six inputs, including:
- The remaining balance on a mortgage
- The total of all home equity loans still outstanding
- Money needed to pay off student loans
- The unpaid principal on a car loan
- Any money owed relating to personal loans
- Finally, the total of all outstanding credit card debt
The calculator then provides the user with one output:
- The total of all outstanding debts to be paid off using the proceeds from a life insurance policy
Using Life Insurance to Pay off Debts
Admittedly, this calculator is quite simple and produces an estimate that could be done on a piece of paper too. The reason for publishing this calculator has nothing to do with its complexity; it is to stimulate thought on this topic. Many online calculators, including one of our own, calculate the amount of life insurance based on income. That is to say, the amount of life insurance purchased is enough to replace the income generated by the insured if they should pass away. This is a very logical way to figure out how much life insurance is needed but it does ignore outstanding debt, and in many cases it might be desirable to pay off all debts in addition to replacing income.
In fact, we will eventually launch a life insurance calculator that takes a more comprehensive approach to calculating how much insurance to purchase. For example, debt addressed by this calculator accounts for purchases made in the past. An income-based calculator estimates how much insurance is needed to replace the income provided by someone. Our comprehensive calculator takes both variables into account and also considers large future expenses such as putting a child through college or paying for a wedding.
Buying Life Insurance Efficiently
When buying life insurance another consideration is the type of insurance to buy. Simply stated there are three types of life insurance policies:
- Universal Life Insurance: with this type of policy, the person is covered for life, which is why it is also considered a permanent life policy. Universal has a savings component, or cash value, along with lifetime protection.
- Whole Life Insurance: another form of permanent life insurance, whole life policies are the most common type of insurance sold. Both premiums and death benefits are fixed, and the benefit is payable as long as the policy premiums are paid.
- Term Life Insurance: the most cost-efficient way to purchase life insurance is with a term policy. As the name implies, premiums and coverage can be fixed for the duration of the policy, which have terms of one to 30 years.
The right type of insurance to purchase will vary according to the gap the policyholder is hoping to fill so it’s best to become an educated buyer before making any purchase decision or inviting an insurance agent into your home. There are pros and cons associated with each of the three policy types. Doing your homework will pay off in the long run because a life insurance policy is a long-term financial commitment.