The decision to get life insurance to protect your family is a big step. Coverage is important, and investing in life insurance is a long-term financial commitment. For these reasons, you want to be certain that you have enough coverage to meet your needs, as well as a policy that you can easily afford. So what's the magic number when it comes to buying life insurance?
For many people, the decision to buy life insurance isn't as hard as deciding how much to buy. While many people are not sure how much life insurance they need, 4 in 10 households without any life insurance know that they would have immediate trouble paying living expenses if they were to lose their primary wage earner.1 At Protective Life, we don't want anything to stand between you and getting the right coverage for your family. While we understand that every situation is different, the following three considerations may help you better gauge how much life insurance you may need.
What to consider
#1: Having enough to replace your income
Stop for a minute and think about what your life insurance policy does. If you were to die, your paychecks would stop, right? The fact is, your income is quite possibly your greatest asset. Because of it, your family can afford to live their current lifestyle. When it comes to calculating how much life insurance to buy, at the very least you should look at having enough to replace your income so that your family will have what they need to maintain their standard of living.
#2: Calculating how long they'll need the income
If you're raising very young children, you may want to consider having enough life insurance to offer financial security until they turn age 18. However, if it's just you and your partner, then you may not need to replace your income for as long. In either case, you'll want to do some math to determine how many years your family may need to have income replacement.
#3: Factoring in your current assets
Before you buy a policy, take a minute to look at your assets. How much do you have in savings and/or investments? Do you have any additional income streams such as commercial property? Do you have any additional life insurance through your employer? Also factor in any assets that your family can use to live on after you're gone.
These considerations are to help you get started in estimating how much insurance you may need. Keep in mind that in addition to replacing your income, you may also want to consider final expenses such as funeral costs and the possibility of outstanding medical bills, the special care needs of a child or aging parent, and any future needs such as education.
Adding it all up
Now that you've given some thought to your life insurance needs, it's time to do some math. Take the figure you came up with in regards to your income replacement, multiply it by how long your family may need coverage, and then subtract your assets or other income. While it's not a scientific formula by any stretch, it will at least get you somewhere in the ballpark.
If you want an easier way to determine how much life insurance your family might need, try our needs analysis calculator. Simply key in the numbers and the calculator does the math for you!