It is very likely that most of us are underinsured when it comes to our life insurance needs. In the event of an untimely death, the financial repercussions for the loved ones we leave behind may result long-felt and unintended consequences. Having adequate life insurance coverage can help prevent financial problems for those we leave behind.
How much life insurance do I need? The primary purpose of life insurance is to replace current and future lost wages produced by the insured for those dependent on this income. As a starting point, apply the rule-of-thumb that you need five to ten times your annual salary in total life insurance coverage.
- Consider how much extra money your spouse and dependents will need to cover basics such as food, clothing, housing and healthcare per year.
- How long (in years) will they need this supplemental income before (or if) they are able to adjust financially. Multiply your total in #1 by this number of years.
- Next, calculate total current and future educational expenses for your children.
- Lastly, add the balances of your mortgage, vehicle loans, personal loans, credit cards, any other debts, and anticipated funeral expenses.
- Now subtract the amount of life insurance you currently carry from your employer and all other sources.
The sum of all of these items along with any others you may wish to consider (i.e. inflation) will help to pinpoint the amount of life insurance needed and to determine if adequate life insurance is in place.
As we progress through life we find that our needs may change. Getting married, purchasing a home, having children, planning for college expenses, and retirement planning all come with certain responsibilities. Life insurance is an important part of any financial plan and should be reviewed for adequacy as these needs change.
Not all companies offer the same types of life insurance products. Shop around until you find a product that meets all of your needs at a price you can afford. Ask questions – lots of questions and don’t settle until you’re completely satisfied.
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