Are you considering purchasing a life insurance policy? If you are like most people, you are probably interested in buying a policy in order to protect your family, but you aren’t sure how much coverage you need to buy. The reality is that there are no hard fast guidelines to follow when determining how much coverage you need to have, but there are a few different strategies and rules of thumb that you might want to keep in mind in order to make sure you do obtain enough coverage.
Considering Your Current Income
According to some financial planners, you should consider your current salary when determining how much coverage you should obtain with your life insurance policy. Among these financial planners, the general rule of thumb is to obtain a policy that is equivalent to five or seven years worth of your salary. Therefore, if you make $50,000 per year, you should seek out a policy that provides you with a $250,000 to $350,000 benefit. If you have young children or a significant amount of debt, they recommend calculating your coverage based on ten years worth of salary. In this case, you would seek out a policy for $500,000 if you make $50,000 per year. Here are some examples.
Determining the Needs of Your Dependents
While income calculations can provide you with a simple way to determine how much coverage you need, there are other factors that come into play when determining how much coverage is truly necessary. It is important to keep in mind that the primary purpose of life insurance coverage is to make sure your dependents are able to maintain their current lifestyle after you are gone. Therefore, if your spouse works and if you don’t have any debt, you may not need to obtain as much coverage as someone whose spouse is a stay-at-home parent.
Some questions to ask yourself when determining how much coverage you need include:
- Will your spouse have to pay for childcare expenses if you pass away?
- How much debt do you currently have?
- What types of assets do you have?
- Will your children be leaving the home soon?
- Will your children have ongoing financial needs even after they become adults?
- Can your spouse handle paying the bills based on his or her income?
- Will your spouse be able to continue working after you pass away?
- If your spouse does not currently work, will he or she be able to find gainful employment after your passing?
By asking yourself these critical questions, you should be able to determine how much coverage is truly necessary to help your spouse maintain his or her lifestyle after you pass away.
Deciding How Long You Need the Coverage
In addition to determining how much coverage you need, you also need to decide upon how long you need your life insurance policy to be in place. Although many insurance agents will encourage you to have a policy in place your entire life, this isn’t always necessary. After all, the purpose of your life insurance policy is to help your dependents after your passing. If you don’t have any dependents, having a life insurance policy in place may not be necessary.
If you have children, you will certainly want to have a life insurance policy in place until they are old enough to take care of themselves. Therefore, you will need to consider the age and needs of your children in order to determine how long you will need to have a policy in place. In most cases, it is best to have a policy in place until the youngest child is 22-years-old.
If you are married and have no children or if your children are no longer dependent upon you, you might want to keep a life insurance policy in place until you reach retirement age. Therefore, if you are 40-years-old, you will want to purchase a 25 year policy in order to have coverage until you are 65-years-old.
It is important to remember that life insurance can become quite expensive one you reach 60-years-old. In addition, it should never be considered a substitute for a retirement plan. Rather, you should plan your finances in such a way that you will have enough to live on when you retire.