Determining how best to structure your life insurance policy can be a tricky endeavor. You don't want to end up with too much or too little, but how do you decide what that perfect amount is? Buy too much, and you're throwing money away. Buy too little, and your family may be left holding the bag when they need you most. Here's a look at how to determine exactly how much life insurance you need.
For the purposes of this article, we're going to discuss term life insurance specifically, as the goal is the proper coverage for you and your family, not determining what the 'better investment' may be. But the first question you should ask is whether or not you even need life insurance. There's no right answer to this question, as it's purely a personal consideration. But as a rule of thumb, if you are unmarried and without dependents, you could probably avoid the purchase. It may be best to carry a little bit of insurance, so you can cover your funeral expenses in the case of an unexpected tragedy. But if you do have people who depend on your income to survive, you should at least carry enough life insurance to temporarily cover your earnings.
Many websites and experts will suggest that the simplest way to determine the amount of life insurance you need is to seek out a policy that corresponds to a multiple of your salary. But what's the right multiple? How can you ever know if 5, 10, or 15 times your annual salary will be enough in the end? So the determination may hinge on a judgment call. What do you want the life insurance to accomplish for you? Do you see it as a short term band-aid for the situation, or do you want your policy payout to support your family for an extended period. Be honest about your goals, and that will help you further define the policy you need. At that point you could probably turn to an online life insurance calculator to determine the right multiple.
Also worth considering is how much, if any coverage you receive through your employer. However much they give you is a fantastic addition, but you should generally consider it as such, and not rely on it as your primary insurance policy. At some point down the line you may lose your job, and you wouldn't want to lose all your health insurance coverage at the same time. That's two big headaches to contend with.
If you're buying life insurance, chances are you're married. So how financially independent is your spouse? Do they work, and bring home a livable income? Or are they a stay-at-home parent or entrepreneur? If they don't have their own life insurance you may want to consider getting them a policy as well. But remember that together you will have to share the burden of the expenses, whether your spouse has income or not.
There are several other factors you should consider. Is your entire family getting health insurance coverage through your job? If so, remember that they'll have to fund private health insurance out of the life insurance policy. Analyze your career path, your family plan and any other major life changes you hope for or expect. Any large shift in your life will necessitate adjusting your policy. So do you buy the perfect policy for where you are right now, or the one that will fit your family in the future? You don't want to buy too much insurance, but you also don't want to let it slide and miss increasing your policy because you've fallen ill.
In the end, each individual has his or her own needs, and a cookie cutter approach just won't apply. Understanding life insurance and being honest about your desires for your family in their time of distress will help you make the best choice.