People want to protect their family but they still have to live on a budget so a question we get all the time is, “How much life insurance do I need?”
We get it. And it’s a very smart question, financially. You don’t want to be throwing money away for a policy that has an “overkill” amount of coverage.
So, we’ll take a look at one of the old standards for life insurance and then detail a better way of finding your perfect coverage amount.
Multiplying your income by 10
This used to be the golden standard for purchasing a policy. You wanted to leave at least 10 years of your income for your family.
However, as we better understand now, this doesn’t work for everyone and what about those in the family who aren’t bringing in an income?
We’re not saying it’s a terrible rule, but there’s a better way of calculating how much life insurance you need.
Answering the complicated question: How much life insurance do I need?
Instead of arbitrarily multiplying your income by 10, you need to take multiple factors into consideration.
Of course you want to provide income replacement. However, you also need to cover debts and plan for the future.
So, multiply your income by the number of years you think your family will need your replacement income. Then, add in your mortgage payoff amount (if applicable) and other outstanding debts such as car loans, credit card payments, and etc.
You’ll also want to add the amount for your funeral and burial or cremation costs.
After that, is there anything you need to help your surviving family plan for such as college tuition or a car for your children or grandchildren?
That’s when you’ll arrive at the magic number: the amount of coverage you need.
What if I have a savings account built up?
If you have a nest egg of some sort built up, should you subtract that from your coverage amount? Technically, you could.
However, if you can afford it, you shouldn’t unless you have a very large savings account in place.
Through the years, your income will raise and so will your debts and expenses. And, of course, there’s inflation.
So, you usually want to round up your coverage amount if you can. Most of the time, for a term policy, a difference in $50,000 is only a few dollars per month.
How to save money on your life insurance
There’s ways to save some money will still having proper coverage.
One of the best ways to do this is to buy separate term life policies of different amounts to cover certain life events.
So, for instance, one of the most popular reasons to get life insurance is to cover your mortgage. In this case, you’ll buy a 30-year term policy or however long the mortgage is for to cover that debt and your policy will expire when your mortgage is paid because you no longer need that coverage.
Another way to save is to work with an independent agent, like us, who can shop your policy with numerous carriers to find you the best rate.