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:
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.