How Much Life Insurance Do I Need?
That’s up to you. Life insurance needs are very individual and depend on a number of factors as well as personal preference. If you’ve done some research already, you’ve probably found a range of recommendations. A common recommendation is to buy a life insurance policy with a death benefit that equals a multiple of your salary, often ranging from five to 15 times your salary. Depending on your needs, this multiple can vary widely. The bottom line: Everyone’s needs are different.
There are several factors to consider to help you determine the right amount of coverage for you. Let’s take a closer look at each.
Who depends on your income?
To start, you’ll want to consider who exactly you need to protect from the loss of your income. For many people, they’re aiming to protect a spouse or partner and children. For others, this might be extended family or aging parents.
How long will they be dependent on you?
Many people determine a coverage amount based on how many years of income they’d want to replace. For example, let’s say you have young children. If something happened to you, how many years would your family need to replace your income?
What are your goals?
Think about why you need life insurance. Would it simply be to cover your funeral expenses and pay off any outstanding debt? Or would you want it to make sure your loved ones can maintain their lifestyle, meaning they can stay in their home and meet their expenses with minimal disruptions? Maybe you also want to help ensure future goals are met, such as paying for your children’s college educations even if you are no longer here.
Doing a needs analysis.
Predicting exactly how much money your family would need is impossible. But you can get a good estimate by doing a needs analysis.
There are many types of needs analyses you could do, from simple to complex. You could roughly estimate your life insurance needs by doing some simple multiplication. For example: After considering the above factors, you might estimate that you need around five times your annual salary to ensure your family is protected and your goals are met. From there, you’d seek out a policy that covers you for that amount.
You can also do more specific calculations as well. For example, you might add up the immediate, ongoing, and future expenses you want covered if you pass away. (These could include funeral costs, living expenses such as the mortgage, and college tuition for your children.) Then, add up other assets your loved ones can rely on: a surviving spouse’s income, your retirement savings, other investments, and so on. Finally, subtract the financial resources available from the estimated expenses. That will give you the estimated amount of insurance coverage you need to fill the gap.
An insurance producer or financial professional can also walk you through the steps to help you determine how much life insurance is right for you and your budget.