While you’re weighing life insurance costs and benefits, one question that’s sure to come to mind is the amount you really need to fulfill your goals. If you’ve got a keen mind about what you require and made these sorts of calculations before, figuring it out shouldn’t be too difficult.
If you’ve never really thought about how much you need, though, then seeing all those policy amounts might start to get daunting, and making a choice won’t come easy. Thankfully, there are a few common sense rules you can follow that will help you arrive at a decision.
Remember Why You’re Getting Life Insurance
To get a better picture of how much life insurance you need, you need to start by thinking about your reasons for getting insurance in the first place.
In a good number of cases, the reason for getting insurance is to provide a safety net for your family in the event of your passing. With that in mind, you don’t want to get so little insurance that the amount would be useless, but you also don’t want to get so much that you’re paying excessive premiums that could go to other family needs.
Your goal should be to strike a balance, and you can do so by asking yourself a few basic questions and adhering to some simple insurance calculation principles.
Calculating Your Insurance Needs
There are varying schools of thought on how you should calculate your insurance needs. One popular method is the “5 to 10” rule, whereby you multiply your annual income by at least five (and no more than ten) to estimate your insurance needs.
This rule of thumb (and others like it), though, doesn’t take into consideration all of the variables that go into your family life, so it could have you missing the mark when it comes to figuring out how much insurance you should buy.
A better approach is to take a detailed look at your obligations (salary, the number of years you want to replace your salary with life insurance, debts, future needs, college costs, funeral costs, child care costs, etc.). You should then subtract your assets to help you arrive at a more precise figure for the amount of insurance you might need.
Of course, tallying all of this up might be tricky if you aren’t the most skilled with numbers, so remember that if you’re looking for an easier method of getting in the ballpark when it comes to your insurance needs, you might also try taking a look at an online insurance calculator, which allows you to input the numbers you’re working with and arrive at a pretty close estimate.