There are certainly some unnecessary insurance policies out there, but life insurance usually isn’t one of them. But how much life insurance do you need? Many people are actually over-insured. In order to figure out how much life insurance you need, you need to take into account the following factors:
- Does someone depend on you for their maintenance? This can be a spouse, children, grandchildren or elderly parents. If someone depends on you, life insurance is for them.
- How much do you make each year? A good rule of thumb is to be insured for right around 5 to 7 times the amount you make each year, after taxes. This way you can help those left behind remain supported while they get back on their feet.
- How much debt do you have? It is a good idea to make sure debts can be discharged with life insurance. If possible, getting enough life insurance to ensure that the home mortgage can be paid off is a good idea. That way your loved ones won’t have to worry about where they will live.
- How close are you to retirement? The closer to retirement you are, the less life insurance you need. As you age and (hopefully) become more financially stable, you should be paying off debts and other obligations (such as raising children) lighten. This means that life insurance is less vital to those that depend on you.
- Can you afford it? Even a little life insurance is better than none. Check to see what you can afford, and make sure that life insurance premiums are causing undue strain on your budget.
Beside all this you should also compare life cover as it is really important for you as an insurance buyer. This will give you a fair idea what you should expect from your policy cover and what each company offers.
Other things that you should keep in mind include such things as whether your spouse works already, and how much he or she makes, what sort of funeral expenses are likely to be incurred, and whether you want your life insurance to aid your children through college. All of these factors will add to the decision of how much life insurance you need.
You can combine term insurance with whole life to maximize your coverage. Term life insurance is great when you are younger and have more responsibilities and obligations. And, because it doesn’t build cash value, and ends after a set period of time, term life is usually very cheap. You can get a large amount of coverage for a smaller price. Look for policies that offer a partial premium refund if you live to see the end of the term. Add a lesser insurance policy with whole life, and it can serve as coverage for a life partner if you die later, after the term life has run out. Whole life also builds cash value. And while it doesn’t return as much as other investments, it still often provides a tidy return, and you can cash it in later to take a vacation or to invest in your retirement account.
Use this life insurance worksheet from Good Housekeeping to determine how much life insurance you need.