For many of us, this is the million-dollar question when it comes to buying life insurance. Fortunately, there are ways to help you crunch the numbers and better determine how much coverage you may need to immediately meet your obligations and to replace your income upon your death.
One way is with a life insurance needs calculator. These online tools are a convenient, quick method for estimating how much coverage you may need. Another good plan is to meet with an insurance agent or financial advisor who can review your family's debts, assets, and financial goals, and provide you with a solid estimate.
But no matter which method you choose, there are many variables to consider that can make a big difference in determining how much life insurance to buy so you don't overestimate - or worse, underestimate - your needs.
The following are five questions to consider prior to plugging numbers into a needs calculator or when meeting with a qualified agent:
1. How much money would your family need today to live on if you didn't make it home from work?Simply put, how much money would your family need each month/year to maintain their current standard of living? Begin by reviewing you monthly bank statements and looking at how much you actually spend each month - don't just guess.
2. What assets do you have now?What's in your savings account? What about your investments (such as your 401(k))? Do you have any other life insurance policies? If so, what are the policy limits? You need to know these numbers. Consider your assets first, and then figure in your debts to get an estimate of “how much life insurance do I need?” You might find that you don't need to replace all your income based on these findings.
3. How much debt are you carrying?Think about how much debt you're carrying - including your mortgage. If you have substantial debt, be sure to factor it into your life insurance calculation so that your family will have enough coverage to pay it off. Start by reviewing you monthly budget. Consider how long it will take you to pay off car loans, credit cards, etc.
4. Do you have a stay-at-home spouse?The stay-at-home parent caring for young children is often seen as not needing life insurance. The fact is, even a stay-at-home parent who isn't drawing a paycheck may still need life insurance. Think about the estimated costs associated with having to hire a full-time caregiver for your children if your spouse should die.
5. Have you factored in additional expenses unique to your situation?
Many people become fixated on income replacement and forget to include additional expenses such as funeral costs, final medical bills, the cost of college, care for special needs children, or even funds for taking care of an elderly relative. Be thinking about how much these additional expenses can add up and include them in your calculations.
These are just some of the questions to consider when estimating how much life insurance to buy. By doing a bit of homework and with a solid set of numbers in hand, a qualified agent can help you determine the best policy type for you.