How Much Life Insurance is Needed?
This question provides one of those “not-so-clear” answers.
Paying off debts
If you’re purchasing life insurance to meet certain financial obligations, such as paying off your home or other debts, the answer is quite simple. You want to make sure you have enough coverage to pay off the amount of your debt at death. Whatever amount that may be.
Plan ahead. If you anticipate an increase in your debt in the near future, it’s not a bad idea to buy more coverage up front to make sure you have enough in place when you take on that additional debt. That way, you don’t have to buy a separate policy and possibly go through medical underwriting again.
Replacing an income
This can be a little more challenging to answer because you must consider the amount of income you want to replace and for how long it needs to last.
People frequently ask if there are any general “rules of thumb” to use to simplify this process. There are. But they’re just broad guidelines, and you should always talk to your financial professional to make sure these amounts are right for you. Simply put, use a multiple of your annual income.
If you’re young and married, have a house and one child, you may consider three to seven times your annual income as a starting point for coverage.
As your family and financial obligations become larger, and maybe your spouse would like to stay home and raise the children, you could start with seven to 10 times your annual salary for initial coverage.
Some things that may increase the amount of coverage you’ll need:
- College tuition expenses for several children.
- Using insurance to pay off all debt AND provide an ongoing income.
- Providing a sum of money that will generate an income without depleting the principal amount. As opposed to gradually spending down the life insurance over time.
Here are some things that could reduce the amount of coverage you may need to purchase:
- Employer-provided life insurance (as long as you’re employed)
- Spousal income
- Social Security Benefits
- Other personal savings
While these may reduce the amount of life insurance coverage you buy, make your estimates conservatively. It’s better to have too much coverage than too little.
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