How Much Life Insurance Coverage Do You Need?

How much life insurance coverage you need will depend on your family situation, assets, and expenses. However, deciding what the right amount for you and your family can be confusing. You will find that insurance agents and authoritative websites give different and strong advice for which calculation to use. Here are three of the basic calculations for deciding how much life insurance coverage to purchase. Use the one that makes the most sense to you and for your family’s needs.

The Mortgage Formula

With this formula, you consider the mortgage on the house and the current working status of each parent. For a parent working full time, you want to have life insurance coverage that equals twice the amount due on the home mortgage. For example, if the mortgage were $250,000, you would want at least $500,000 for each working parent. This way if one parent passes, the mortgage is paid off and there is extra cash.

If one parent does not work outside the home, you may only need half that amount for the non-working parent. In the example above, this would be $250,000. The idea being that the surviving parent has a full-time job that can pay the mortgage and the extra cash from the insurance policy will be used for daycare and other expenses related to raising the kids.

Income Replacement Formula

With this simple formula, the gross annual salary is multiplied by a minimum of ten years up to the number of years you have until retirement. If you make $50,000, are 30 years old, and plan to retire at age 65, then you will need a policy that pays between 0.5 to 1.75 million upon your death.

Line Item Formula

Some insurance experts feel writing down and adding together every expects expense is the most accurate formula, but it will take some time to calculate. It is an exact calculation of basic expenses your family would need for life should you die today. To make this calculation you need to add up the expected expenses such as mortgage payments, daily living expenses, college, childcare, medical, and any other predictable expense over the next few decades.

An insurance agent can work with you on different formulas to determine how much insurance you need. You may need to also consider how much you can pay per month towards life insurance premiums. The more coverage you get, the higher the monthly or annual premiums will be.

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