When deciding how much life insurance coverage you need to purchase, there are a few factors to consider. For this blog, we will take a look at three questions to ask yourself and how they will play into the final recommended amount of coverage you will need.
What is your current financial situation? For this component, you will need to add up what you have right now in assets and debt. Add up the balances of all current savings and investment accounts and future pension payouts. Then add up your current debt including your mortgage if you have one, outstanding loans and other financial obligations. You also need to project how much your savings/investments will increase in future years and hopefully how much your total debt will decrease. What you need in coverage now may look different in 10 or 20 years, so it’s important to evaluate your coverage at certain points. You may want to consider purchasing a 10- year term life policy and when it comes time to renew it, make adjustments based on your current financial situation. However, be aware that your life insurance rates will increase as you age.
How many dependents will you be covering? If you are married with children, that is an obvious answer but what if you are married with no children and your spouse makes a good wage? In that case, you can choose to buy a minimal amount of coverage that will provide funds for funeral costs and maybe some extra to help with their retirement savings. Or if you are single, do you want to provide monthly financial support for an aging parent (s) or continue providing support if you are already doing so? Also, do any of your dependents have health issues that would require additional money for medical expenses?
What financial support do you want to provide? Ask yourself what kind of lifestyle you want your dependents to have if you were to pass away. For example, do you want them to be free of any financial worry—no mortgage or debt, living expenses taken care of and money set aside for college? Or if you have a stay-at-home or part-time working spouse, do you want to provide enough coverage so they will be able to pay for funeral costs and short-term expenses until your spouse can get back into the workforce full-time?
After you ask yourself these three questions and add up the costs for everything you wish to cover at the time of your death (and for the future), take that total and deduct the amount you already have in savings/ investments and project to have in the future and you will have a general idea of what life insurance coverage you will need. This is not an exact science but going through this process will help you come up with a number closer to what your family actually needs as opposed to generically taking your salary and multiplying it by a certain number.