How Much Life Insurance Do You Really Need?
Are you someone who understands the importance of life insurance but still hasn’t purchased a policy? One of the reasons people delay buying life insurance is not knowing how much coverage they need, and they want to avoid buying too much or too little.
If you’re one of the many people asking themselves, “how much life insurance do I really need?” this article is for you. Below, we’ll explore how to determine the amount of life insurance you should purchase to safeguard your family’s future.
What is life insurance?
Life insurance is like any other type of insurance — its goal is to help manage risk and protect you from unexpected financial losses. When you purchase life insurance, you buy a specific dollar amount of coverage. If you pass away while your policy is active (typically 10, 20, or 30 years for term-life insurance), your loved ones will receive a lump sum.
The main goal of life insurance is to ensure you have adequate coverage. You don’t want to buy too much as policies can be expensive, and you don’t want to buy too little and risk your loved ones not having enough money to cover their living expenses if you pass away.
Why do you need life insurance?
People purchase life insurance to cover various scenarios and expenses. Life insurance proceeds are commonly used to pay for:
Funeral and burial expenses
Settle debts (mortgage, student loans, etc.)
College tuition for children
Charitable gifts
Retirement income for surviving spouse
Estate taxes
How much life insurance do you need?
One of the most challenging things about life insurance is knowing how much coverage you need. There are three simple approaches to determine the proper amount of life insurance.
Rule of thumb method
The simplest way to estimate the amount of life insurance you need is to use a rule of thumb calculation. The most common way is to multiply your annual income by 10 — that number should be the amount of coverage you buy. Be aware that this approach is more limited than the needs or human life value approach as it doesn’t factor in specific expenses.
Human life value approach
The human life value method is another way of calculating the amount of life insurance coverage you need. The human life value approach focuses on the financial loss that occurs when someone passes away and considers various factors such as age, salary, and planned retirement age.
Needs-based analysis
The needs-based approach is the most accurate way to determine the amount of life insurance you need. A life insurance needs analysis is comprehensive — considering how much you will need to cover funeral, estate settlement, and other expenses.
A needs analysis also considers the amount needed to make up for lost income. If you are the primary breadwinner of your household, you will likely need to purchase a larger life insurance policy.
The bottom line
Determining how much life insurance you need is crucial in securing your family’s future. A financial advisor can help you choose the right amount of coverage so that your family is taken care of and you don’t spend more than is necessary on insurance.
Don’t forget to check out our blog post on the types of insurance you need, no matter what stage of life you’re in.
