Life insurance: it's a necessity for us all, yet nobody enjoys planning for what would happen if you (or your head of household) were to pass away.
When you have loved ones relying on you, having the right life insurance coverage in place is essential. Specifically, a life insurance payout that can cover not only expenses related to a person's death but ongoing living expenses for surviving family members as well.
One of the biggest challenges in buying life insurance is determining exactly how much coverage you need. While there is no universal answer or formula to determine your ideal amount of coverage, there are some general guidelines that can help you reach a decision based on your family's unique needs and finances.
Basic Rule of Thumb for Determining Amount of Life Insurance
When it comes to getting a basic guideline for how much life insurance coverage you may need, it can be helpful to take your annual income and multiply it by 10 as a very general rule.
For example, if you make $100,000 per year, your estimated coverage amount would be $1 million. Of course, this method of determining life insurance coverage doesn't take any unique factors aside from your income into consideration, such as your amount of debt, long-term financial goals, dependent children, or savings.
Still, it can be useful to apply this rule as a way of getting a very rough estimate of your potential life insurance coverage needs.
Term or Whole Life Insurance?
Another important consideration to keep in mind when purchasing life insurance is whether to opt for a term- or whole-life policy, as there are major differences between the two.
Term Life Policy
Coverage that is only in place for a predetermined length of time. Some common increments include 5, 15, and 30 years.
Whole-Life Policy
Coverage that is generally designed to continue at the same premium until the day you die. With these policies, your payment will not change from the day you make the purchase until the day the policy matures, or you are deceased.
Which is Right for You?
Once your "term" runs out, you can choose to renew with another term policy or possibly convert to a whole-life policy depending on your changing needs. Term policies tend to be more affordable than whole life policies, but they often don't provide the same quality coverage as a whole-life policy (which is in place for a long as you make your premium payments).
Special Considerations When Choosing Life Insurance
For many, a whole-life insurance policy provides the best level of coverage and the greatest peace of mind. Should you decide to choose this type of life insurance coverage, there are some special considerations worth keeping in mind to help you determine your exact coverage amounts.
Monthly Spending Needs
Start by taking a detailed look at where your money goes each month. This will include taking a look at several months' worth of bank statements to determine. Consider not just how much money you're bringing in, but how much you're spending and what you're spending it on.
You'll want to make sure any life insurance policy you take out would include at least enough coverage to allow your surviving loved ones to live the same standard and quality of life as they do now.
Existing Debts
Don't forget to also factor in any existing debts that would remain if you were to pass away.
Some common examples of larger outstanding debts include your home mortgage, student loans, and any vehicles that are not yet paid off. The more debt you have, the more coverage you'll want to make sure you have in place so that these debts can be paid off by your life insurance policy as needed, thus saving your family from the financial burden.
Family Needs
Speaking of family, be sure to think about their current and future needs as well. For example, if you have school-aged children now, do they have a college fund set aside?
If the answer is no, you'll want to make sure you have coverage to pay out at least $100,000 or so for each child, which will help to finance their college educations when the time comes.
Existing Savings
Just as you'll need more coverage if you have large outstanding debts, you may be able to get away with less life insurance coverage if you have large amounts of existing savings.
Of course, if you'd like to be able to leave these savings for your family after your passing, then you'll need to be careful not to rely too much on these existing funds to offset your life insurance costs.
There are many factors that need to be taken into consideration when purchasing life insurance coverage, including your own age and health.
Ultimately, the best way to figure out your ideal amount of coverage is to work directly with an experienced and trustworthy life insurance agent who will be able to assess your unique situation to help you come up with a recommendation that suits both your needs and your budget.