How Much Life Insurance Do I Need?
When we purchase other types of insurance coverage, such as auto or homeowners insurance, we base the amount of coverage on the value of the item being protected. How do we determine then the amount of life insurance that someone needs?
First of all, we need to determine the value of what is being protected. While no policy can insure we will live forever, it should more accurately be referred to as death insurance. Doesn’t have a nice ring to it, does it? We will continue to call it life insurance then.
How do we calculate the value of someone’s life? Think of it in this way. Let’s imagine that you are a money machine. Every payday the machine produces a paycheck. What if the machine broke down all of a sudden and could not be repaired? Where would the future income for mortgage payments, raising children, college educations, car payments, etc. come from? We are all money machines and there can be no assurance that one day the machine might break down prematurely. While nothing can replace a human being or the other true values of life, insurance can be used to replace the broken machine. The proper amount of coverage can take care of all of the current and future needs just as if the machine had never broken.
Are you starting to get the picture that life insurance is mainly a replacement of future income? While there are many ways to calculate the amount of life insurance needed, the proper amount would take care of all of the future expenses and goals had we lived.
While everyone’s situation is different, here are some general questions to ask yourself and guidelines to follow:
• Are others dependent upon my income such as a spouse or children?
• Do I have current debts such as a mortgage, credit cards or other loans that would need to be settled?
• Do I have children that are likely to attend college and had I planned to fund their education?
• Do I own a business that would suffer or close at my death without the funds to hire my replacement?
If you added together the future income that we planned to make along with the other expenses, the figures could be staggering. The minimum amount of coverage for someone answering yes to the questions above would be 10 times their annual income. Of course, the amount of coverage can be reduced by the amount of funds already put away in savings to take care of these needs. The amount can also be reduced as these needs are reduced over time. The bottom line is that our needs for life insurance change constantly and should be reviewed often.
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