How Much Life Insurance Do I Need?
Life insurance can help policyholders look after their loved ones once they are gone.
There are many things to take into consideration if you want to ensure you make the best decision possible.
In this article, we will be covering everything you need to consider when asking yourself how much life insurance do I need?
What’s the Perfect Amount of Life Insurance for You?
When trying to figure out actually how much life insurance you should purchase, there are a few key factors that you need to keep in mind.
1. Your Assets
It is very important to calculate all your assets. This will help you find out what you have and what you would be leaving behind.
Your assets can be used to cover your financial obligations as well as support your dependents.
Your assets include everything you own. These can be:
2. Your Financial Obligations
Here, you need to calculate all of your and your family’s debts. Consider all other recurring expenses and possible future expenses. These may include:
- Credit card
- Other debts
- Family support for lost income (5 years at least)
- Kids expenses (if you have)
- College tuition (if you have children)
- Funeral expenses
While some of these are easy to calculate, such as debts, others might be confusing. If you live alone and don’t have any dependents, that is all you need to consider.
But for many, that might not be the case. If you have a spouse, children, or parents who depend on you financially, you need to take this into consideration.
3. Your Lost Income
If you have people that depend on your income, such as a spouse or retired parents, consider adding extra coverage to your life insurance. This will help them get on their feet quicker.
To calculate the amount of coverage you will need, take your annual income after tax and multiply it by the number of years you think they will need support for.
For example, if your spouse is a stay at home parent, see how many years are left till the kids finish college and your spouse can get back to work.
In any case, the number of years should not be less than five.
4. Your Kids Expenses
If you have kids, you know it can get quite expensive. The USDA calculates that it can cost up to $14,000 a year to raise a kid.
You can try to estimate yourself how much it costs for your family, or you can take this estimate and calculate the cost for each child till they turn 18.
Keep in mind that this excludes college tuition, which we will look into next.
5. Your Kids College Tuition
College tuition is one of the biggest expenses for every family. But it can help your children to build a stable future and the ability to take care of themselves.
You can check how much the colleges you want your kids to go cost, but don’t forget that prices usually go up every few years.
6. Your Funeral Expenses
Most young adults probably don’t think about their funeral and the expenses related to it. It is clever to include these expenses to your life insurance coverage so that your loved ones don’t have to worry about that during what will probably be the most difficult of times.
The average cost of a funeral is around $7,000 – $10,000. Not a small expense, and as such, it should always be included in your life insurance coverage.
Once you have calculated all of your assets and expenses, you can easily work out the amount of life insurance coverage you need.
Simply add all of your debts and expenses and deduct the assets. If you are employed, you might also have a group life insurance plan. Check about this with your employer, and if you have one, deduct that policy as well.
This will give you a clear picture of what you should aim for when getting life insurance. The next step is to decide how much can you actually afford.
How Much Life Insurance You Can Afford
When calculating how much life insurance you should buy, you also have to consider, how much can you actually afford?
If you can’t afford how much you actually need, you still should purchase a smaller policy that you can afford to be able to provide for your family in some way.
After all, some life insurance protection is better than none at all.
If you are just starting a family, it might be better to go with term life insurance. The premiums will be more affordable for the same coverage.
Don’t worry if your financial situation changes, as you can always adjust the coverage later. This can be done with riders.
Once your term life insurance policy finishes, most life insurance companies will allow you to sign a new term policy on good terms.
Should You Get Additional Life Insurance?
If you have life insurance already, it is important to reevaluate your needs and financial commitments every once in a while.
This can help you make sure you always have enough coverage. Don’t worry if you find out that you don’t have enough coverage as you can always get a supplemental life insurance policy or add to your existing one if your life insurance provider allows this.
To check if you have enough life insurance coverage, use the same calculation method we described earlier. There are certain situations in life when you should recalculate whether you have enough life insurance coverage. These include:
- New family members. When you are expecting a little addition to your family, it is very important to add the new member into your calculation. You do want the best for all your children, whether it’s the first one or the third.
- Moving to a new house. If you and your family are moving to a new house that is more expensive, you will probably have a bigger mortgage. This is a good reason to recalculate the coverage you need because your financial obligations are higher now.
- Your spouse decided to become stay at home parent. This makes you the breadwinner, and you don’t want to risk your family’s financial well-being in case something happens to you. Think about how many years your family would need your income replaced and add that to the list of expenses.
- Your parents retired or got ill. If your parents or any other family member needs your financial support, don’t forget about them. Getting additional life insurance coverage can save them from a financial burden if you are not around anymore.
Deciding How Much Life Insurance You Need
Getting a life insurance policy is ultimately an act of love towards those who depend on you. When it comes to our loved ones, their security tends to take priority.
This does not mean that you should go for the highest policy as it might harm you and them in the short and medium terms.
By carefully considering all the options available as we discussed, you can be sure that you and your family will be comfortable now and for many years to come.