How Much Life Insurance Should I Have? Determining Your Coverage Needs
If you have a family that depends on you financially, ensuring they’ll be taken care of when you’re gone is an important yet daunting task. A common question amongst parents and spouses is how much life insurance should I have?
The answer is different for everyone. But to help you decide if you have the right amount of coverage, work your way through the following introductory guide.
Numbers to Know
In order for you to determine the right amount of life insurance coverage, there are a few basic numbers you should know. If you find yourself getting overwhelmed, working with a financial advisor can ensure you’re not overlooking anything uncommon or unique to your personal situation.
If you don’t have any dependents, you can expect your recommended coverage amount to be much less than someone with a spouse and several children. You may even be able to forego life insurance all together. Those with several dependents should reevaluate their life insurance needs throughout the years as changes to coverage amounts will likely be necessary.
Some believe life insurance is only meant to cover lost income after the death of a providing loved one. An old recommendation used to tell insurees to multiply their income by 10 to get their ideal coverage amount. But because of inflation and unforeseen additional expenses, using this tactic could leave your family underinsured.
The other issue with this method comes into play if you’re a stay-at-home parent or work part-time hours. If you contribute to the household in other ways, such as cleaning or cooking, the value of these services needs to be considered when determining the correct amount of life insurance coverage.
What you should do instead is take your current income and multiply it by the number of years you will need it to be replaced to keep your family living the same lifestyle. This should be a minimum of the number of years your youngest child is away from no longer being a dependent.
Don’t make the mistake of overlooking debt when determining coverage. Start with your mortgage and add any credit card debt and other debt, like car loans. Don’t forget to add in any applicable or estimated interest. You should also include an estimate of funeral and final expenses your family may incur.
Even if you haven’t begun discussing college with your children, make sure your life insurance coverage will provide the necessary funds for their education. It can be difficult but do your best to estimate college expenses if your children are still very young. If you don’t have children, you can skip this step. Make sure to expand your coverage for every child you have throughout the years.
Even if you only have a bank savings account, make sure you keep this number in mind when determining your life insurance coverage. You should also include other personal assets such as stocks and property.
Do the Math
Now that you have an idea of your current and potential future financial obligations, it’s time to determine a number that will cover them. A simple rule of thumb is to add up your financial obligations and subtract any assets. The answer should put you in the right life insurance ballpark. Here’s an example.
John is married and has two children. He makes $40,000 a year. He owes $200,000 on his home and has $10,000 in debt between car loans and credit cards. He estimates college expenses to be $100,000 per child for a total of $200,000. He anticipates his final expenses to be $15,000 and currently has $50,000 in savings and assets.
John’s equation would look as follows.
$425,000 (debt and expenses) +
$400,000 (anticipated missed income) –
$50,000 (savings) =
$775,000 in life insurance coverage
While thinking of your own mortality isn’t enjoyable, knowing the answer to how much life insurance do I need will provide you with comforting peace of mind. It’s impossible to find an amount that will work out perfectly, but your goal should be to secure coverage that you can afford now that will keep your family comfortable and protected in your absence.