While life insurance can serve a variety of purposes, one of the most common is to maintain your family’s standard of living in case you die. Many rules of thumb exist, such as five to seven times your annual income, but don’t rely on rules of thumb to determine your coverage. They don’t take into account your individual circumstances. Your insurance needs will probably change over time. To determine how much insurance you need, consider these questions:
What lifestyle do you want to provide for your spouse and dependents after your death? Review your needs in detail, taking a look at things like:
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Will the family need different childcare arrangements?
- Do you want to provide for college educations?
- If your spouse doesn’t work, do you want that to continue, or do you expect him/her to work after your death?
- Do you need to consider the support of elderly parents?
- How long must your family live off the insurance proceeds? Will your current retirement fund provide enough income for your spouse to live on after retirement or do you need to provide income until his/her death?
- Do you want to pay off a mortgage or other debt with insurance proceeds?
- Do you have estate-tax considerations you want to address with life insurance?
How much will that lifestyle cost? Come up with an estimate of how much this lifestyle will cost. Include all of your current expenses that would remain the same, as well as any new expenses you have identified. Remember to factor in hidden costs, such as providing for health insurance that was paid for by your
employer. For large debts, such as a mortgage, determine whether it makes sense to pay the loan off in full or to continue making monthly payments.
How much life insurance do you need? First, consider what other income sources your spouse and/or dependents will have. This could include your spouse’s earnings, retirement plans, Social Security, savings, and investments. Life insurance proceeds will be needed to provide the difference.
Your life insurance needs will change over time, so you should periodically go through this analysis.