One of the most common questions that clients ask us is: “How am I supposed to determine how much life insurance do I actually need?”
At CS Insured, we understand that the entire idea of purchasing life insurance, or worse, having it be needed, is stressful. After all, you want to make sure that you can provide for your family now. No one wants all of their money to go towards life insurance. That is why it is so important that you purchase the right amount.
The reason that you decide or need to buy life insurance varies from person to person. Because of this, the amount will vary also. Maybe you have a family, you own a business, or you are the primary breadwinner in your household. Here are a few things to keep in mind, depending on why you are purchasing life insurance:
- Income Replacement:
If you are the “primary breadwinner” you will want to ensure that your policy covers roughly 10x your annual income.
- Non-Working Spouse:
If you do not work you will want to ensure that you are covered for about half the coverage of your working spouse
- Final expenses:
Funerals and associated costs add up quickly. For final payments, you should take out somewhere between $10,000 to $50,000.
- Key Person Insurance:
When taking out key person insurance you will want to ensure that you are taking out roughly 1-3x the annual revenue that the employee brings in.
- Buy Sell Coverage for Business:
With this kind of insurance, you want to take out 1 to 1.5x the current value of the business.
Did you know? The primary reason that people buy life insurance is to replace lost income in the event of death.
If you are hoping to replace lost income after the death of a spouse or parent, there are life insurance calculators that can assist you in determining how much life insurance coverage you need.
Some other things to consider when trying to figure out how much life insurance you need are:
- Time Left until Retirement:
A lot of people fail to realize is that their biggest asset is their ability to earn money and work. The majority of breadwinners buy life insurance as a way to supplement that lost income. In the event of an unexpected death, you need to think about how long you need to or plan to work. For example, if you only intend to work for another 5 years, you might not need more than 5 years of coverage.
- Spouse’s Income Potential:
If your spouse is not currently employed how do you determine how much life insurance they need? There are two ways that you can look at this. The first is to consider the cost of someone who does what they are responsible for. Do they take care of the children while you work? Housekeeping? Take some time and add up what it could cost for full-time childcare, a housekeeper…etc… then multiply that by 10. Another way to look at it is to think about how much they could be making if they were in the workforce. What field did they work in previously? How much were they making? Then multiply that by about 10.
- How Much do You Owe in Debt?
It is common to purchase life insurance to as a way to cover the mortgage, car loan, credit debt, business debt. Think about how long the term of payments is. If your mortgage will be paid off in 30 years, do you really need whole life coverage? Would a 30-year term policy work out better for you?
- Consider What You have in Savings & Investments:
If saving and investing have been part of your regular budget, odds are you won’t be too worried about supplementing that with your insurance payout. However, if you have mounting debts taking out enough life insurance to help cover those, without impacting the money you have saved for your loved ones might be the way to go.
Many people tend to think that a general rule for choosing how much life insurance to take out is to aim for seven to ten times your annual salary. While this can be a stable platform to start from, it is essential when choosing a policy to find one that suits the needs of you and your family. Not everyone has been able to make saving a priority, some have managed to live a debt free life. Some people are stay at home parents, some work 80 hour work weeks. Everyone’s situation is different, and because of that, you cannot confidently rely on a general rule when choosing your life insurance.