How Much Life Insurance Is Enough?

One reason for choosing a life insurance policy is to figure how much your dependents will need after you’re gone. In order to choose the face value (the amount your policy pays if you die) of your life insurance use the example below:



How Much Debt You Have

All of your debts must be paid off in full, including car loans, mortgages, credit cards, etc. For example, if you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).

Income Replacement

One of the biggest factors for life insurance is income replacement, which will be a major determinant of the size of your policy. For example, if you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.

Future Obligations

For example, if you want to pay for your child’s college tuition you will have to add this to the amount of coverage you want, which would be about another $100,000.

Putting It All Together

Based on the examples mentioned above, when everything is added together, you will probably want a policy for $840,000 which would cover the following:

  • $540,000 (to replace yearly income)
  • $200,000 (for the mortgage expense)
  • $100,000 (university expense)

Total = $840,000

Once you determine the required face value of your insurance company, you can start shopping around for the right policy (and a good deal).

Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. If you have a spouse or partner that also is a contributor to the family income, then it would make sense to go through the same exercise to determine the face value of the policy.

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