How Much Life Insurance Do You Need?

Purchasing life insurance is one of the most important things people can do to protect their family. However, many people either fail to purchase life insurance or purchase entirely too little to cover the family's needs. It is important to carefully estimate the appropriate amount of life insurance. It can facilitate peace of mind throughout a person's life and maintain the lifestyle of any survivors after a person's death. Calculating financial needs after the death of a loved one can be a difficult task, but it will allow survivors to grieve in peace instead of worrying about surviving financially.

Calculate expenses
The first step in calculating the appropriate amount of life insurance is to figure out present and future living expenses. This typically includes things like groceries, mortgage, insurance, auto payments and maintenance, utilities, retirement, and any future college tuition payments. Most living expenses will not decrease with the death of one family member. The cost of groceries and some insurance may decrease, but many expenses will see very little change, if any at all. Calculations should also figure in the costs of funeral expenses for the deceased, grief counseling for surviving family members, lost wages during the grieving process, and household help to handle tasks that would have otherwise been handled by the deceased family member. The financial impact of a loved one's death is easy to underestimate, so it's important to put pen to paper and be realistic.

Calculate income
Consider how much of your household income will be lost, but also take into account any future income that may be coming into the household. For instance, survivors may receive Social Security payments, pension funds, death benefits from the employer of the deceased, and any income from personal investments. Having a clear, complete picture of one's income can help in the process of making accurate calculations.

Consider other factors
Age is another factor to consider when deciding on the appropriate amount of life insurance. A young married couple with children will want to purchase more life insurance to cover the future costs of raising the children for several more years, including college tuition. An older couple may need a bit less life insurance, though they will want to take into account any retirement expenses and how much they have saved for that. Furthermore, are there any outstanding debts that should be paid off with the life insurance money? If renting, would a portion of the life insurance money ideally be used for purchasing a home?

Pick a number
Should you base your life insurance policy on that offered by your employer - say, twice your annual salary? Probably not, since this money will need to provide an adequate replacement for your salary for much more than two years. Another figure often mentioned is 10 times your annual salary. It's a good idea to establish a range of options, comparing the costs of policies that would provide meager, mid-grade, and very comfortable lives for the surviving family members. Also compare the costs of term versus whole, or permanent, life insurance - the latter of which has a low-yielding savings component built in. Whatever the amount and type of life insurance policy you choose, make sure it will adequately cover the difference between your income and expenses for many years.