If you’ve decided to buy term life insurance, how much should you buy? Even if $100,000 sounds like a lot, how can you be sure whether it’s enough? There are many things to consider when determining how much term life insurance to purchase. The information presented here is to provide you with information on what you should consider when selecting life insurance, and how to estimate how much you may need.
There’s no standard answer to how much coverage is enough. Some financial planners have indicated that you should buy enough life insurance to replace five to seven years of your salary. But what if you have small children or are carrying a lot of debt? Odds are that calculation won’t be nearly enough and realistically you should be replacing as much as 10 years of your salary. So based on this formula if you earn $60,000 a year, you would need to purchase anywhere from $300,000 to $600,000 worth of life insurance coverage.
Many people put off buying life insurance because they don’t think they can afford to buy what they need. In this case, term life can often be an affordable way to get the coverage you want — but you still need to calculate how much. From the example above, you already know that there are many factors to consider. Remember, the sole purpose of life insurance is to replace your income in case you die so that your dependents can maintain their current lifestyle. Ask yourself the following questions.
Will your surviving partner have enough to live on, pay off debts, and take care of
child care expenses with you out of the picture?
Do you have other assets that he/she can draw from to meet these expenses — including immediate cash for funeral and burial expenses?
Since term life insurance is meant to cover your needs for a specific time period (10, 20, 30 years), make sure the amount you need is in line with the number of years you’ll need it.
For example, for how many years into the future will your income need to be replaced? In other words, will funds be needed until your spouse gets a job, retires, or dies; until your children graduate from college; or some other benchmark is reached?
Then figure how much you make a year and multiply it by the number of years calculated earlier. Next, think about your debts. How much debt do you have (mortgage, car loans, credit cards, other loans, etc.)? Finally, don’t forget to subtract the value of your current savings, investments, pension plan (if you have one), and any life insurance you already have in place.
Using these formulas and figures, you’ll have a general estimate of how much term life insurance you might need. In addition, there are many useful life insurance calculators that you can use, or you can work with a qualified life insurance agent who can provide detailed needs analysis. Regardless of which method you choose, you’ll still need to provide the numbers based on your individual needs to an agent or to plug them into a life insurance calculator.
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