How Much Life Insurance Is Enough
The purpose of Life Insurance Awareness Month is more than just to make consumers aware of the affordability of life insurance, but also to help people ensure they have an adequate amount of coverage in the event of a worst case scenario. The first step in answering the question of how much life insurance you need is to determine whether you need life insurance at all.
Who Needs Life Insurance: The answer to this question is nearly everybody. If you have dependents that rely on your income, you definitely need some level of coverage. If you have debts and other obligations, you should have coverage for this as well. Even if you are single and have no debts, you should still carry at least a small amount of life insurance to cover funeral and burial expenses. The only exception is if you have enough money saved to cover these expenses; if so, you may be able to get by without any coverage.
Life Insurance with Dependents and Debts: There are several factors to consider in calculating the level of life insurance coverage you need. Aside from funeral and burial (allocate about $15,000 for this), the three most important considerations are your annual income, debts and age of dependent(s). Ideally, you want to leave your family debt free and with at least enough money to replace your income until your last child turns 18. To start, list your debts, annual income and age of children. Here is an example:
- Home Mortgage Payoff Balance: $150,000
- Auto Loan Payoff Balance: $15,000
- Balance of Other Debt: $10,000
- Ages of Children: 16, 14, 12
- Annual Income: $50,000
In this scenario, you have $175,000 in debt and your last child turns 18 in six years. With an annual income of $50,000, you would need $300,000 to replace your income for six years. $300,000 (income replacement) + $175,000 (debt elimination) + $15,000 (funeral and burial) = $490,000.
For an individual with these numbers, a $500,000 life insurance policy would be enough to cover the minimum obligations. However, you may also want to consider leaving more behind to help fund the college educations of your children. With the cost of college more expensive than ever, many individuals add $100,000 in additional coverage for each child to pay for higher education. In this example, the level of coverage with college funding included would be increased from $500,000 to $750,000 or even $800,000.
What About Coverage From Work: Many employers offer life insurance coverage to their employees. Typically, an employee can receive a year of annual income in life insurance free of charge with the option to purchase three or four times your annual income on top of that. While this is good supplemental insurance to have and is usually affordable, this should not be the only coverage you have. The reason: if you ever lose your job, your employer-provided life insurance will vanish, leaving you with no coverage at all.
Speak with an Expert: Calculating the level of life insurance coverage you need always depends on your unique circumstances. The best place to start is to speak with an independent insurance broker who can explain your options and help you choose from several of the top insurers in your state. Independent agents are not captive to any particular insurance company or product, allowing them to provide an objective analysis and shop from the best policy to fit your needs and budget.