For many individuals and couples, while visiting a life insurance advisor for the first time, one of the biggest questions is “How much life insurance do I really need?” Unfortunately, there’s no set formula that answers every family’s questions. A number of factors need to be taken into consideration, including your current financial health, levels of income and income goals, and the lifetime financial needs of your entire family. Here’s a closer look at the factors that it’s helpful to bear in mind with respect to choosing your life insurance plan.
Replacing current income
One of the most common places to start when determining your life insurance needs is to consider your current level of income. For example, if you currently make $50,000 per year and expect your income to remain consistent or go up slightly in the years ahead, that’s helpful information. Looking at your family, you may decide that in order for your spouse to be comfortable it’s important to replace ten years of income. A policy around or just in excess of $500,000 could be the right choice for you. If your children are young or your spouse relies on you as the sole provider, it might be important to consider going for a longer period of time. Your base income and expenses are a smart place to begin your calculations.
Consider major debts
For many couples, their mortgage is a major debt and obligation hanging over their heads. Each month, a significant portion of your income is likely dedicated to paying off your house. Owning your home free and clear has several benefits. It will dramatically reduce your monthly expenses, while giving you the security of knowing that your home is always your own. A house that’s paid off is also a significant asset that can be sold if your spouse wants to retire elsewhere or downsize. As a result, many families want a policy that takes into account paying off their mortgage, in addition to replacing the yearly income. In the example above, if the couple had $100,000 pending on their mortgage, it might be appropriate to add that amount to the prospective life insurance policies under consideration. Allowing your spouse to start the next phase of his or her life free of major debt can help put your mind at ease.
Fund future family expenses
If your children are young, there are a number of expenses that you’re likely to incur as they grow. These range from day to day expenses for clothing, food, and activities to major investments such as cars and college. While your life insurance policy is unlikely to cover everything, it’s possible to defray some of these expenses and support your spouse. Working with a life insurance advisor to determine what those costs are likely to be and how to get coverage in a life insurance policy is a responsible step for any parent.
Facing the idea that you may one day leave behind your loved ones or face the death of a spouse is a challenging conversation. However, taking action now before a major disaster strikes will help you know that you’ve provided long-term security and comfort for your family. If you haven’t established a life insurance policy, contact an insurance advisor or broker today.
About the author: Anna White is a financial writer based in Providence, Rhode Island where she lives with her husband and sons. She covers financial news, major business transactions, and personal finance for a wide range of publications.