The right amount of life insurance depends on your own unique situation. When making the decision on how much life insurance coverage to purchase, it is important to consider what you have in terms of assets, income, expenses, as well as what your family will need for the future.
The most common reason people buy life insurance coverage is to replace the income that their family would lose if something happened to you (or the insured individual). Things to consider are whether you want to replace all of your income, a portion of your income and the number of years the income is needed. Stay-at-home parents should also be considered, since the benefit provided, while not directly income related, would cause a financial burden if they were no longer able to care for your children. A stay-at-home parent’s value is estimated at $40,000 annually.
Debt is something that contributes to the total amount of life insurance you will need. Mortgage, credit cards, car loans and education expenses are some examples of debt obligations. Life insurance can be used to pay down debts with high interest rates, such as credit cards. After that, consider which debt payments are manageable for your family and which are not. The payments that create the biggest burden could be paid off using life insurance.
Educating your children can be very expensive. There are many ways to save money for education (and some with tax advantages). Unfortunately, if something unexpectedly happens to you, there may not be enough time to set aside funds for education.
Home repairs and automobile repairs are two of the most common expenses surviving spouses incur after a death. If you don't have three to six months’ worth of income readily available, life insurance can be used to pay for those unexpected expenses.
If you have coverage through work, find out if the coverage can be continued if you decide to leave your job. Many policies offered through work cover you while you are employed with them, and do not continue once you change jobs. If you already have life insurance, it is usually a good idea to keep it and add to it if you need to increase the coverage amount. If you are considering discontinuing existing coverage and replacing it with new coverage, be sure to carefully compare your existing coverage and the proposed new coverage.
The best guideline for determining the amount of insurance to purchase is to calculate how much cash and income your dependents would need if you were to die today. Your new policy should come as close as you can afford to making up the difference.
What your dependents would need to be financially secure if you were to die now:
What your dependents would receive if you were to die (include savings accounts and other assets)
- $ __________
How much life insurance you need:
= $ __________
The cost of life insurance is based on your age and health. The sooner you buy, the lower the cost will be and coverage will be locked in at your current age and health status. You can’t predict the future, but life insurance can help you be prepared.