According to a recent study*, 62 percent of people in the United States had some type of life insurance in 2013. One-third of those people thought they didn’t have enough life insurance coverage.
Determining how much life insurance coverage you need can be tricky. It depends on many different factors, which you can use to calculate the right amount of coverage to protect your loved ones years after you’re gone.
Life insurance policies are usually purchased to replace the income of the policyholder. So, you could start by taking your annual income, adding a little extra for inflation, and then multiplying that amount by the number of years you want your loved ones to be covered. Many people purchase enough life insurance to replace their income for 5 to 10 years to help their families recover financially. Besides replacing your income, life insurance policies can also help pay any expenses you may leave behind.
Examples of things to consider when determining how much coverage to get include:
Generally, if you have a large amount of money saved or if your spouse plans to work after your death, you may not need as much life insurance to help your family with expenses.
Examples of things to subtract from your life insurance coverage needs include:
The higher the coverage you want, the higher your life insurance premium will be. So, it’s important to balance what you think your coverage needs are with what you can afford to pay for the premium. If you stop making payments for any reason, the policy will be canceled, and your family won’t receive any money after your death. Different companies can charge different premiums for the same life insurance coverage, so it’s important to shop around and compare policies.
It’s a good idea to periodically review your life insurance policy and your finances to determine whether you still have the right amount of life insurance coverage.
Some things that might change how much life insurance coverage you need include:
It’s always a good idea to get sound financial advice and planning before you decide to purchase or update a life insurance policy.
eHealthInsurance is not a law firm or tax advisor and is not providing legal or tax advice regarding your life insurance planning.
* Insurance Barometer Study, LIMRA, 2013.