In my opinion there is no magic number or very precise calculator you can use to figure out how much life insurance one needs, but there are several things to consider when planning to purchase life insurance.
First, consider what type of life insurance you want to purchase. It’s an age old debate if term life insurance or whole life insurance is a smarter financial decision. Before you make a decision do some research on both types to see which fits your lifestyle better. Never purchase any insurance without fully understanding what you are buying. It’s easy to get talked into buying something you will later regret.
Second, you need to consider your actual funeral and burial costs. Typical burial and funeral costs are less than $10,000. Many times if you are employed your employer will offer you this amount of life insurance as part of your benefits package. It’s always important for your spouse or loved ones to know about this in case of your death.
Third, you should consider your family. Do you have children? How many children? If you want to ensure your children are covered financially until they are adults you may want to consider a larger life insurance policy. This may include college, weddings, automobiles, and general costs associated with raising children.
Next, consider the amount of debt you will leave behind to your loved ones. Home, auto, credit cards and personal loans should all be considered when calculating the amount of life insurance you need. I personally think this number is inflated by insurance sales people. My wife and I have discussed this greatly and several things would change in the event of one of our deaths. For example we would only need one automobile, the survivor would probably downsize our house and general living expenses would decrease. Therefore even thought you have $30,000 in auto debt and $200,000 in house debt you may not need $250,000 to cover this debt. You might be able to sell one auto to pay off the other and downsize your house to $100,000.
Also consider your spouses employment situation. In the event of your death would they continue with their current routine? If they are a stay at home parent and you want them to continue this lifestyle you will need a large policy in order to cover your income, retirement and children’s expenses. If they are currently employed and plan to continue their employment a much smaller policy may work for you.
Planning to meet the financial needs of your family with life insurance is one of the most important steps in creating a sound financial plan. Almost every financial adviser will suggest this as the first step in financial planning. How much and what type of life insurance is ultimately up to you and your own judgement. Use these suggestions as a guide to help you determine the right amount!