How much life insurance do you need?
It’s a tough question. You don’t want a policy that’s too small that won’t meet your family’s needs. On the other hand, buying too much life insurance would be a waste of money.
How much life insurance is enough?
Don’t Follow a “Rule of Thumb” or Depend on a Calculator
One of the most common “rules” you will hear about from friends or family is the 10 times rule. Just multiple your income by 10 — that’s how much life insurance you need!
This is almost always inaccurate. There is no way that simply multiplying your income times 10 can account for inflation rates and rising education and burial costs.
Also, relying on an online calculator could be a bad move. Calculators don’t always figure how much you already have in insurance coverage and savings. While these tools are convenient, they don’t tell the whole story.
Use This Formula to Get a Personalized Answer
The best way to calculate the size of your policy is to follow this formula: total financial obligations minus all liquid assets.
- Add up your financial obligations first and include:
- Your salary multiplied by the number of years you want to replace it for
- The balance of your mortgage
- All other debts: loans, credit cards, etc.
- Estimated burial costs
- Estimated college costs for each child
Research the estimated inflation rates for both funeral services and college costs. Also, if you are a stay-at-home parent, calculate the cost of replacing all the services you currently provide for free, such as child care, housecleaning, transportation, etc.
Once you’ve found a total, subtract the following liquid assets:
- Life insurance
- College funds
The total that’s left is the amount of coverage that you need. Don’t be surprised if this total exceeds $1 million — that’s normal. With a long-term policy, you can get the coverage you need for an affordable monthly price.
If you have to pick one, it’s clearly better to have a bit more insurance coverage than you need rather than a bit less. You can buy multiple policies of different term lengths to fit your needs. For instance, buy a 20-year plan to cover your children and a 30-year plan to cover your spouse.
Talk to a Professional
Life insurance is extremely personal because everyone’s financial situation is unique. One of the most effective ways to accurately determine your family’s financial needs in the event of your death is to speak with a professional.
Make an appointment with Four Seasons Insurance and get information about available policies and guidelines to determine how much life insurance is enough for you.