When you buy a life insurance policy, it's important to get the right amount of coverage. Too little and you could leave your loved ones in a tough financial spot. Too much and you'll be paying for coverage you don't need. Here's an overview of things to think about when you're calculating your needs.
Is anyone besides you relying on your income right now for living expenses? Perhaps your spouse or your children? If you died tomorrow, they no longer have your paycheck. That's why the first item you consider is income replacement. One easy method is to determine how much money your loved ones need each year and multiply that by the number of years they need it. For example, this could be the total years until your children become adults.
Debts and obligations
If you have any outstanding debts, you likely want your life insurance to cover these expenses as well so they don't fall on your loved ones. Consider the remaining balance on your mortgage, credit card debt and any other types of debt. You may also want to add some extra money for this category to cover the cost of your funeral and other final expenses.
Total available funds
What do you already have saved? You may already have some of your needs covered. In which case, you can subtract that amount from your life insurance needs. If you have any income other than your salary - dividends from stock as an example - you can also count those as you look to offset future obligations. And remember to include the face amount of any life insurance policies that you already own or have through your employer since these may pay out at your death.
Now that you've outlined the basics, you have a solid starting point. There might be other items to consider. Talk over your calculations with your family - and perhaps even an investment advisor - to make sure you haven't overlooked anything. Then you're ready to select a policy that's right for you.
Want to quickly determine how much you might need? Check out our needs analysis calculator to get started.