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When it comes to buying life insurance, there are many things that can cause confusion and complications. One of the most perplexing aspects for buyers can be choosing the right level of coverage. How much is too much? How much is too little? How much life insurance should you have? You don’t want to overspend, but you also don’t want to leave your family high and dry if the worst comes to pass.
There are many tips out there for calculating the ideal amount of life insurance you need. One of these general tips is to secure about 7 years worth of income in the policy. However, there are more determining factors to take into account. Read on to find out the top 4 questions you need to ask yourself when figuring out how much coverage is ideal for you.
What are your short-term financial needs?
For these purposes, short-term debts include credit cards, car loans, tax dues, and small personal loans. Add these up, along with estimates for hypothetical expenses such as medical bills or repairs for damages in the home.
What are your long-term debts?
Your long-term debts include your mortgage, student loans, and, if you have children, their costs for tuition – both for any private schools they may attend as minors, and college. Look at current tuition costs and factor in a slight rise to account for inflation in later years.
If your family were to maintain their current lifestyle, how much money would they need?
Assess the cost of your family’s lifestyle by adding up all of the usual expenses incurred in a year. All mortgage, utility, credit, tax, grocery, transportation, and childcare costs should be included. You should add in extra funds to cover other living expenses such as occasional travel and clothing. To answer the question: How much life insurance should you have?, take the resulting sum and multiply it by the number of years you plan to be using your income to support your family.
How many assets do you and your family own?
Your family’s assets include savings, investments, extra automobiles, social security or other benefits, and home equity. “Liquid” – assets that can easily be converted into cash – are the only assets that should be counted in this case.
Once you’ve calculated these sums, subtract your financial resources (Assets, #4) from your total costs (Debts and Cost of Living, #1+2+3). The resulting amount is the minimum level of financial coverage you should secure in your policy. Reassessment of these numbers should be done every year to ensure that you still have an adequate level of coverage for your family.
If you’d like assistance determining your life insurance needs, contact us right away. One of our experts can provide you with key advice and guidance.