How Much Coverage Do You Need From Your Life Insurance Policy?
There are numerous questions to be considered and answered before you
can determine the amount of life insurance you need to fully protect
your family should you die at an early age. How much is your mortgage
and other debt? What amount is necessary to replace your income, and for
how long? Are college funds important to you and your children? How do
you calculate for inflation? What about retirement for the remaining
spouse? These are all questions you need to ask yourself before
determining the amount of life insurance you should purchase.
While arriving at the amount of insurance your family will require, you must consider any stocks, bonds, or other liquid assets that you currently own. For example, money in savings accounts, stock and bond portfolios, home equity and retirement accounts can be deducted from the amount of insurance you feel is currently needed. However, if you decide to do this, you are limiting your family's options. Home equity, for example, is of no use if your spouse wants to keep the home. Retirement accounts should be kept until retirement, if possible, as they will be needed at that time. Many people would prefer to keep their savings and portfolio funds as an emergency fund should the need arise. Taking all of these into consideration, you should probably purchase a life insurance policy that will cover all current expenses.
When deciding upon the amount of coverage you will need for a life
insurance policy, do take into account any "free" life insurance that
you or your spouse may currently have through employer insurance
policies. If your employer provides you with a life insurance policy,
usually a multiple of your annual salary, and your spouse receives the
same benefit, then this amount could well be deducted from the life
insurance policy you are currently considering purchasing, as it would
be adequate gap insurance coverage.
It is a generally accepted practice that financial experts recommend that you have at least enough life insurance and liquid assets to equal five times your annual income. It is considered prudent to have an equivalent of eight times your income when considering inflation. The truth is that life insurance is cheap, especially if you are a young family, so it is easy to increase the face value without looking at a large increase in premium.
There are several Internet sites that provide calculators to assist you in estimating your life insurance needs. Many of the sites require that you provide specific information regarding your individual situation, so that they can provide information taking into account factors such as estimated Social Security benefits for survivors, estimated college costs for children, and even estate taxes that may be incurred. Some sites also allow you to choose a projected inflation rate and predict the possible interest rate on proceeds that you have invested.