How Much Life Insurance do You Need?
[social_share]You’ve decided to get a new life insurance policy. Do you know how much you need? How much life insurance is really enough? A small life insurance policy might be perfectly adequate for you. Then again, you might need a far more significant life insurance benefit. How do you know how much you need? Fortunately there are some ways to make that decision by simply looking at your current financial situation and what you could reasonably expect for the future. Let’s explore those.
When trying to determine how much life insurance you need, start by asking yourself the following questions:
1. Do you have a family to support?
If your income is the sole or primary income for your family, your life insurance should help them continue in the same quality of life when you’re gone. That might mean getting a life insurance policy that would pay off your mortgage on your house, pay off other debts you owe, and continue to provide a liveable income for your surviving family. The size of your life insurance policy would also be determined by how long you expect it to support your family. Do you want it to cover your average income for five years? Or would it be preferable to have it cover the income you could be expected to earn between now and retirement age?
On the other hand if you’re single and you have no family to support, you might be able to get away with a much smaller life insurance policy. A policy that would cover your end of life costs and existing debts might be enough.
2. How much debt do you have?
Your current debt can significantly affect how much life insurance you need. For example, if you rent your home you can probably safely have a much smaller life insurance policy than if you owed $200,000 on a mortgage. Also consider car loans, credit card debt, student loans, or any other type of debt that you would want covered if you should pass away.
3. Does your policy need to cover future expected debt?
An obvious example of future debt you might want your life insurance policy to cover would be your child’s future education. It’s a reasonable expectation that if you live you’ll help them pay for that in some way. If you’re unable to do that, you’ll want your life insurance policy to fill that void as much as possible.
Future debts don’t only apply if you have children though. Also consider your parents. Are you expecting to help support them in their old age as their health deteriorates? Will someone else be able to if you’re gone? If not, you might want to increase your life insurance benefits so they’ll be provided for when they can no longer provide for themselves.
No one can simply throw a number at you and tell you “this is how much life insurance you need.” You have to make long term financial decisions regarding your family and make sure your life insurance policy fits into that plan. Whether it’s just you or you have little ones to consider, how much life insurance you need is not a decision to take lightly.
