How Much Life Insurance is Enough?

Life insurance can be of major assistance to your dependents after your pass away, but how much life insurance is enough? How can you balance the amount you pay in life insurance premiums now with the benefits your family will receive after your passing? It's a complex question, and one that requires consist ant re-evaluation. An individual's financial status is constantly changing, and if leaving behind enough resources after your death to support your family is of foremost importance, then you will probably want to adjust your life insurance plan as your financial forecast changes.

Below are some items to consider when determining how much of a life insurance plan you need.

In Addition to Life Insurance Benefits, Consider other Income Sources

If you are a family with children in the United States, it is fairly likely that both you and your spouse work. Even if you are no longer contributing to the financial security of your family, your spouse will likely be able to retain their income-earning status. Of course, there may be additional costs involved if you and your spouse worked different schedules in order to decrease the cost of child care.

If reducing the cost of your life insurance premium is important to you, then make sure to consider the income of your spouse.

Consider Your Life Insurance Goals

When considering how much life insurance you need, it's important to understand what your goals are with life insurance. If your goal is to not leave your family with any debt, or leave them to cover the costs related to your death, then you could probably make do with a smaller life insurance policy. If you want to be able to provide the same financial contribution to your family after your death as you currently do, then you will want more life insurance.

Keep in mind that there are two different types of life insurance, term and whole-life. If your primary concern is providing for your family financially while your children are still at home, then term insurance will be a less costly option for the same amount of coverage. If you want coverage throughout your entire life, you will need whole-life insurance which is more expensive for similar benefit.

In Addition to Life Insurance Benefits, Social Security May Help Dependents

Social security is usually not enough to make up for a missing income-earner, but it will help. When considering how much life insurance to get, try to figure out what kind of contribution social security will be making, and make sure your life insurance will cover the rest.

Consider Other Investments When Investigating a Life Insurance policy

Consider whether you will be leaving behind any income-producing assets, like rental property. Also, consider what assets could be liquidated or converted into income-producing assets. These assets may be able to help offset the missing income a bit, thus reducing the amount of life insurance that you'll need.

The 20 Times Rule for Life Insurance

Your life insurance agent may suggest the 20 times rule when it comes to figuring out how much life insurance you should get. This rule is that you should get a life insurance policy for 20 times the amount you earn yearly. The idea is that the money can then be invested at a modest rate of return to allow your dependents to live off of the interest earned.

This model for purchasing a life insurance policy doesn't take into account several other factors including inflation and other income-producing assets, but it may be helpful to come up with an initial number.