How Much Life Insurance Do You Need – All The Facts

How much life insurance do I need?

How much life insurance do I need?Buying life insurance keeps your loved ones covered in the eventuality of your death. Taking out life insurance coverage gives you peace of mind that your family isn’t left high and dry dealing with debts such as the mortgage on your home. Depending on the type of policy, life insurance covers unexpected costs, such as funeral expenses, while still covering current and future expenses. 

While it may seem easy to calculate current living expenses and debts, you also need to factor in your dependants’ financial needs further down the line. This could include college tuition, childcare, and even a supplement to your retirement income. You may need to consider your aging parents if you’re paying for their caring needs.

Are you wondering, “ how much life insurance do I need to buy?” While the answer depends on your own personal situation and financial circumstances, getting all the facts beforehand will help you make the right decision. Read on as we talk about life insurance and how to calculate how much life insurance you should buy.

Calculating How Much Life Insurance To Buy

Taking out life insurance to cover your funeral expenses and other costs related to your death is always a good idea. However, if your intention is to make sure your loved ones are able to cope comfortably without your income, you need to consider buying adequate coverage.

Most insurance advisors recommend calculating how much life insurance you need by increasing your current income by 10 to 15 times. This allows for a market-related increase in daily living expenses and inflation. However, your coverage amount will also be determined by how much you can afford and your net worth.

The best way to calculate adequate life insurance coverage is to follow a formula that includes your financial obligations and existing resources.

The First Step To Calculating Life Insurance Coverage

The first step to calculating how much life insurance you need to take out to give your family adequate coverage involves the following:

  • Adding up the total of your liquid assets
  • Estimating your total expenses and debts

When adding up all your liquid assets, you need to include resources such as your income (after tax), cash, and money in the bank, such as your savings and checking accounts. Your total expenses such as raising your children and debts (any amounts you owe anyone) are referred to as your financial obligation.

When you have these two figures available, you’ll be able to calculate the coverage gap by subtracting your total expenses and debts from your total liquid assets on hand. The coverage gap is the amount of life insurance you should buy. It’s always advisable to take out additional coverage to ensure your family has a cushion against any other unexpected costs.

Key Factors To Consider When Buying Life Insurance

When calculating how much life insurance to buy, you need to consider key factors, especially when taking into account all your expenses. Estimating your family’s future financial needs is essential to get sufficient insurance coverage.

Estimating Expenses

Based on the calculation formula used to get to your coverage gap, make sure you take into consideration all current and future expenses. These could include the following:

  • Household expenses for five years
  • Raising children until they reach 17 or 18 years old
  • Caring for aging parents
  • College fees
  • End-of-life expenses

Medical bills, retirement income, estate taxes, and covering business running costs are other expenses you need to factor in when calculating current and future expenses.

Estimating Debts

Key Factors To Consider When Buying Life InsuranceIt’s easy enough to assume the mortgage of your home still needs to be paid off when you die. But, what about other types of liabilities? The following outstanding debts should be factored in when calculating how much life insurance you need:

  • Student loans
  • Vehicle loans
  • Credit card
  • Store accounts

Debts and liabilities place a huge burden on a family when they lose you as their main breadwinner. This becomes a serious problem if your spouse has co-signed on any loans or the mortgage. Creditors may request that debts are repaid  and money might be taken out of your estate to cover those.

Special Circumstances

Something else you need to factor in when calculating how much life insurance you need is special circumstances. If you’re a parent to a disabled or special needs child, your main concern could be ensuring they’re financially secure for many years after you’ve passed on. Additional caring needs and other expenses must be factored in to ensure your special needs child is well-provided for.

If you’re running your own business, you’ll need to calculate all expenses related to its operations. This must be included in your estimated expenses calculation figure. Any amounts owing by the business must also be noted and included in your final calculations.

Frequently Asked Questions (FAQs)

What Is The Cost Of Life Insurance?

The cost of life insurance depends on how much coverage you buy and for how many years. Your health, age, and gender also play a role in how much you’ll pay for life insurance. On average, you can expect to pay anything between $180 per year to $590 per year. The older you get, the higher the premium, which could be in the region of $900 to $1,600 annually.

How Much Life Insurance Do I Need As A Rule Of Thumb?

A rule of thumb is used by many insurance advisors when advising how much life insurance you need. This should include your total death benefit coverage. The rule of thumb is estimated by calculating the amount of coverage to equal 10 to 15 times your annual earnings.

While this is a good method for giving you a rough estimation of how much life insurance coverage you need to purchase, it’s advisable to only use this rule of thumb as a guideline.

At What Age Should I Get Life Insurance?

The younger you are, the lower the premiums on life insurance. Insurers will give you better rates when you’re in your 20s and 30s. Life insurance is best for when you have people you want to ensure are financially provided for should you die.

You can get life insurance as a young adult if you have loans that need to be paid off or you don’t want your funeral expenses to become a burden on someone else.

Final Thoughts

Purchasing life insurance is a wise move when you want to make sure your loved ones are well cared for financially in the event of your passing. Using the rule of thumb to estimate adequate coverage for your family’s future needs is one way of estimating how much life insurance you need.

But, taking into consideration key factors is essential to ensuring your family’s needs are adequately provided for in the future. So, before purchasing life insurance, make sure you know what financial obligations and resources you’ll be leaving behind. This way, you can have peace of mind that your loved ones are financially secure when you’re no longer around to provide for them.