How much life insurance you need is like your fingerprint — it’s unique to you.
Your employer’s policy may cover your salary for only one or two years. But then, didn’t someone once say you need to replace your salary for 10 years? While that’s a good number to start with, you might actually need far less or far more life insurance depending on things like your age, financial situation, whether others rely on your income and other factors.
No need to pick a number out of a hat or crowdsource the question, “How much life insurance do I need?” on Twitter. Here’s how to find the right answer for you.
DECIDE WHAT YOU WANT TO COVER
When you have nailed down your financial plan, you know your everyday expenses and your big goals like vacations, paying for your kids’ college or weddings and retirement. So when you’re calculating how much you’d like to cover, take those costs into consideration, as well as ongoing ones, like paying for groceries.
Also important: Know that debt, like student loans or a mortgage, may need to be repaid immediately after your death. Morbid, we know. But this is all about planning ahead.
DECIDE HOW LONG YOU WANT THE MONEY TO LAST
If you’re 30 with a spouse and two kids, you have a lot of years to provide for your family. Do you want to provide enough money to get your spouse to age 65 (when you likely would have retired)? Or maybe just to get the kids through school? If you’re 55, you have fewer years to protect, and possibly more financial resources to provide for someone. However, when planning for how long you want the money to last, keep in mind that someone you leave behind may need money to live on for life, even through retirement.
You don’t necessarily need to know the actual dollar amount of your future earnings because your survivors will likely be able to make money by investing some of the death benefit or buying an annuity. But knowing how long you need the money to last can help you arrive at the amount of insurance that you need.
REASONS YOU MIGHT NOT NEED AS MUCH LIFE INSURANCE
If you’re in a good financial situation and there aren’t many people depending on your income, you may not need as much life insurance as people who have dependents. If you’re married without children and your spouse works, you may just need enough money to pay off debts rather than to help continue your spouse’s lifestyle.
Even if you do have children, if you have significant assets, you may not need as much life insurance. After all, if you already have significant money in your children’s college funds, you won’t need insurance to pay for all their college costs. Similarly, if your house is paid off and you have a healthy retirement and investment account, you might not need as much to cover the loss of your salary.
REASONS YOU MIGHT NEED MORE LIFE INSURANCE
If you and your spouse work, the loss of one income isn’t as big a blow to your family’s finances as it would be if you’re the sole breadwinner. But if you’re the family’s sole breadwinner, you may need more insurance. If you have significant debts and little savings, your family would need more just to maintain its lifestyle.
If you own a business, you may need insurance so other owners can buy your family or spouse out of the business.
CONSIDER MORE THAN JUST THE DEATH BENEFIT
While the death benefit is the primary reason you buy life insurance, permanent life insurance has a number of uses during your life. The cash value of permanent life insurance can be an important part of your financial plan. With many policies, cash value is guaranteed never to go down in value, which can make it a very stable asset that’s easy to access.
CALL IN AN EXPERT
Online calculators like this one can help you get a sense of how much life insurance you need. When you’re ready to get serious about buying insurance, it’s a good idea to work with an expert. He or she can take you through many of the considerations above and more to determine the right number and right type of policy for you.