How Much Life Insurance is Enough?

The reason for choosing life insurance is to protect your family after your gone.  In order to choose the face value (the amont your policy pays if you die) there are a couple different figures to consider.  As a general rule we recommend 10-12 times your annual income.  So, if your income is $50,000/year, you should have $500,000 - $600,000 in coverage.  The idea, with this method,  is that the beneficiary could invest the insurance proceeds in good growth stock mutual funds that will generate enough income to replace your salary after your gone.  Or, it could simply be used to pay off debts and save for other things.

Another method involves a bit more math but is still very simple.  Cosider the following:

• How much debt you have: All of your debts must be paid off in full, including car loans, mortgages, credit cards, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).

• Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income. Just to replace your income, you will need a $400,000 policy. Remember, you have to add this $400,000 to whatever your total debts add up to.

• Future Obligations: If you want to pay for your child's college tuition you will have to add this to the amount of coverage you want, which would be about another $100,000.

Adding everything together, you will probably want a policy for $840,000 ($400,000 to replace yearly income + $200,000 for the mortgage expense + $100,000 university expense + $4,000 for the car note).

Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal).

Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you.

If you have a spouse or partner that also is a contributor to the family income, or a stay at home parent that takes care of the kids, housework, meal prep, etc., then it would make sense to go through the same exercise to determine the face value of the policy.  Often times, stay at home parents, are overlooked when considering life insurance.  We encourage truly looking at the contributions that they make to the household and realizing that to hire someone to take care of these duties, would be very costly.  Thus, it's always a good idea to have a life insurance policy in place!

We would be pleased to talk with you about potential options and provide a no obligation quote!  Contact us today.