How Much Life Insurance Do I Really Need?

In the world of insurance, this seems to be the million-dollar question—how much life insurance is enough? Obviously, no one wants to pay more than they have to for insurance, and it doesn’t make sense to get so much extra coverage that you’re spending far more than necessary. So, how do you find the balance?

Figuring out how much life insurance you need starts by taking the time to figure out your financial situation and consider the reasons you’re buying the coverage in the first place. If you’re just getting it for future protection, you might have a harder time determining what you need as opposed to when you’re buying it to cover final expenses or make sure that the kids can go to college.

There are plenty of life insurance calculators that can help you determine how much coverage you can get, how much it will cost, and how long the coverage will last (in the case of term policies). This can be insightful in your decision-making, but don’t let it be the deciding factor. Your own input matters, too.

Consider the following when trying to figure out how much life insurance you should buy. 

Debts and Expenses

What kind of debts and/or final expenses are you leaving behind? While you might not be able to calculate exactly how much debt you’ll have in the future, you can get an idea by considering where you’re at now. And when you’re not entirely sure, it’s best to spring for more coverage to be safe. It won’t cost a lot extra, but it will provide plenty of additional peace of mind. Consider:

·  Unpaid bills

·  Mortgage(s)

·  Estate taxes (if applicable)

·  Funeral expenses

·  Credit card debt, loans, etc.

This will ensure that your family has the funds to cover your expenses in the event of your death.

Intended Use of Coverage

What are you buying the policy for? As mentioned earlier, some people just want general protection while others will be looking for an investment vehicle, a way to send their kids to college, etc. Consider what expenses you will be covering with your life insurance and how much those are. Add in a little extra for inflation if you’re planning for things like college education, to be safe.

It’s helpful if you can consult with a life insurance agent or another expert. They will help you better understand the different types of policies and the coverage that you can get, as well as how to choose what you need based on the reason that you’re buying coverage in the first place.

Ways to Estimate Coverage

There are several options for estimating the coverage that you need. Some experts suggest simply multiplying your income by 10, which will provide more than enough for the major expenses, if not all of them, in most cases. This doesn’t take a detailed consideration of what your needs are, though, so it might not be as effective.

Perhaps you’ll choose to use the DIME formula, which is basically a breakdown of what we discussed earlier:

·  Debts and final expenses

·  Income replacement

·  Mortgage debt

·  Education expenses

You might also need to factor in stay-at-home parent income, any in-home care required for spouses or adult children, etc., so this method isn’t foolproof, either. Ultimately, it’s best to just sit down and do the math to figure out what you need.

What Can You Afford?

The reason that this is the last consideration on the list is that it shouldn’t be the entire focus of your choice. Life insurance does need to be within your budget, but most people can afford a lot more than they realize. Set your budget, but remember to leave room for slight adjustments in case you decide to get a little extra coverage.