How Much Life Insurance Do I Really Need?

When it comes to the long-term financial future of yourself and your loved ones, few things are as vital as life insurance. But getting a policy on your own is more complicated than simply clicking a button—there are many different factors to take into consideration when purchasing and many myths that prevent people from getting the protection they need.

One clouded area is how much life insurance coverage a person should buy. Do you need $25,000 in coverage or $2 million? The possibilities are endless. Needless to say, there is no easy answer and each person’s situation is unique. Here are some things to consider when thinking about your coverage amount.

How Much Do You Need?

So you’ve chosen a provider, you know what type of policy you’d like to get, you know how long the policy will last and who will receive the benefits of your plan, but now is the time to decide how much coverage to purchase.

Certain factors, such as having a pre-existing condition, may limit the amount of coverage that is available to you. However, for the purposes of this post, let’s assume that you are a healthy 40-year-old individual looking to buy a 20-year term policy. There are four major things to consider at this stage of the buying process:

• What do you want to protect?
• How well do you want to protect it?
• What can you afford in your budget?
• What riders do you want to add to your policy?

Knowing what you want to protect is oftentimes the simple part. You want to protect your loved ones. But that’s not all. If you have assets and, more importantly, liabilities such as debts, you will need to make sure those are included in your coverage amount so that your loved ones aren’t saddled with those expenses when you’re gone.

Some debt holders offer loan forgiveness after death, but that’s not always the case. If you have things like car payments, mortgages, credit card debt, or student loans, you will need to make sure that your coverage amount exceeds the sum of those debts.

The next thing to consider is how well you would like to protect your loved ones. Obviously, your answer is “as well as I can,” but you will need to balance that against the premium cost that the plan will require. Many people choose to have their spouses or children be their beneficiaries, which will require considering what they will need down the road should you pass on.

For example, if you are purchasing life insurance to protect your young children, you may want to make sure that your untimely death will not deprive them of their first car, a good education, or even the funds for a wedding. Therefore, you will want to make sure your coverage amount also includes extra money for the major life events your children will likely go through.

So we’ve gone over why you should get as much coverage as possible, but you need to weigh that against what you can afford. You don’t want your future financial safety net to come at the expense of your current financial security. Getting $2 million in coverage might more than cover your debts, assets, and future life events of your loved ones, but the premium might be too high to handle in the present. Ideally, your policy should have a negligible impact on your current finances and have a substantial effect on your future finances.

Lastly, you want to consider policy riders. These are special options that can make a policy more flexible and accessible. For example, you might opt for the accelerated death benefits rider, which allows you to access your benefits before your death to pay for things such as medical bills. Or you might add the accidental death and dismemberment rider that provides additional coverage for accidents and loss of limbs.

However, as useful as these riders can be, they often come at the cost of an increased premium or a lowered coverage amount. Insurance providers are interested in decreasing their risk, so anything that increases that risk will cause a fluctuation in either the premium or the benefits. Simply keep this in mind when considering adding riders to your policy.

Put It Into Practice

Let’s look at an example to demonstrate the importance of properly understanding how much life insurance to purchase.

Dale is a 40-year-old CPA who makes $90,000 per year before taxes. He has a wife that doesn’t work and primarily takes care of their three children, who are between the ages of 11 and 16. He has $100,000 remaining on his mortgage as well as regular car payments of $250 per month. Overall, his family’s monthly expenses are about $6,000 per month or $72,000 per year.

As the sole provider for these expenses, Dale’s income is vital to the financial security of his family. In order to protect them from destitution should he pass away suddenly, Dale will need to take their current expenses into account when purchasing life insurance. Ideally, that starts with replacing his salary. But for how long? Dale also needs to take into account future expenses. His oldest will be going to college in a few years, and with college tuitions running anywhere from $5,000 to $50,000 per year for four years, Dale will need to consider these possibilities for all three of his children in the coming years. It wouldn’t be fair for him to limit their choice of school or career because he hadn’t planned ahead enough.

Therefore, considering that he will need to replace his salary for at least as much time as it takes for his children to graduate from college, Dale calculates that he will need to start with at least $990,000 in coverage. Then, taking into account college tuition for each child, he adds an additional $350,000 in coverage to fund their degrees. This leads him to purchase $1.4 million in coverage. As a healthy 40-year-old male, he finds a 20-year term policy that costs him about $60 per month in premiums. This is something that Dale can readily afford in his current budget and is more than worth the peace of mind he enjoys knowing that his family’s financial future is safe and secure for decades to come.

How LifeQuote Can Help

Deciding how much life insurance coverage to purchase can be difficult, but that’s only one part of the process. There are many more factors to consider when purchasing including which provider to choose, what type of policy to buy, how long you’d like to be covered for, and who you would like to be named as the beneficiary, to name a few.

Making the wrong decision in any of these categories can cost you valuable time, effort, and money. The best thing to do in order to avoid common pitfalls is to have a life insurance agent analyze your situation and help you make the best choices for the financial future of your loved ones.

Here at LifeQuote, our agents will work alongside you to find the policy that best meets your needs and the needs of your loved ones. Contact us today or use our free online quote generator to see how you can make life insurance a part of your financial plans.