No one enjoys thinking about their own mortality, but a little forward planning is important when you have people that depend on your income. As a spouse, parent or guardian to a minor, you have responsibilities that don’t end if something happens to you. Purchasing term life insurance becomes a priority, but how much coverage do you need? Here are the four basic factors that determine your number.
Your current salary contributes to your family’s overall financial picture. If it disappeared, the result could be devastating. To figure you how much coverage you need, it’s important to determine how many years you would expect to bring in that salary. If you are relatively young, coverage is less expensive, but you need a larger dollar amount to cover the extra years between your current age and your projected retirement age.
Even if you replace your salary, when children reach college age, it is important to fund their education. A good rule of thumb is to add an extra $100,000 for every child that will be going to school in the future.
If you are in debt, you want to make sure that your life insurance will pay off any outstanding bills. That should also include funeral expenses and any possible medical bills. The last thing you want loves one dealing with during their grieving time is the added stress of unpaid bills.
If you own a house, the balance due on your mortgage is a major factor in choosing coverage amounts. If something happened to you, would your surviving heirs be able to keep the house without your income? If not, it is a good idea to put provisions in place to minimize the financial burden of homeownership. Make sure your life insurance is enough to pay off any outstanding mortgage and leave enough left over for annual expenses like property taxes and maintenance.
While there is no one number that works for everyone or even one formula, these are some of the biggest factors that will impact the amount of coverage you need. If you aren’t married and don’t have dependents or own your home, your financial liability is less. The more people you leave behind, the more you need to plan for the unexpected. By multiplying your salary by the number of years between now and when you would retire, adding extra to cover college and any outstanding debts and paying off your mortgage, you give your loved ones financial protection.
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