Figuring out the right amount of life insurance is essential if you want to make sure that your family is protected in the case that you die before they do. How much life insurance you need depends on whether your income could be replaced if you die, how much debt you have, how much your family spends, and what additional financial obligations you might want to leave them. It’s important to consider your finances carefully and the needs of your family to make sure you buy the right amount of coverage, without paying too much for insurance you don’t need.
One simple rule of thumb: buy a life insurance policy with a death benefit equal to 10 to 15 times your annual income. If you earn $50,000 a year, for instance, you’d want to consider a policy with a death benefit of $500,000 to $750,000. That way, your beneficiaries will have income to replace yours and to pay for the ongoing costs of living for several years after you die. Again, this is a very general guideline, and your needs might be different.
For a better estimate, first consider your current financial obligations – mortgage, car loans, credit card debt, student loans – as well as the day-to-day household expenses that require payment. Think of housing, utilities, groceries, healthcare, and education costs (if you have young children, you’ll need to factor in future expenses such as college tuition).
Secondly, look at any other assets your family might have now, such as savings, investments, other life insurance policies or other insurance coverage. If you already have significant assets, then you might not need as much life insurance. On the other hand, if your family’s income is largely dependent on yours, you will want your coverage to replace your income for a significant period of time.
Aside from helping your family with immediate expenses, you might want to use your life insurance to help them with longer-term financial goals such as putting your child through college or leaving a bequest. To do this, you might need to purchase some insurance above and beyond what you need to replace your everyday earnings.
Your individual needs will determine how much life insurance you want to buy. Only you know your specific financial situation and what you are trying to achieve for yourself and your family. When you have a clear picture of your income, your debts, and your long-term goals, you can find a policy that provides the appropriate protection and financial security for your family.
