Life insurance pays a death benefit to your designated beneficiaries when you pass away. Purchasing life insurance is an important way to make sure your loved ones do not suffer financially after you are gone. Buying a life insurance policy is almost always a part of smart financial planning- but knowing how much to buy can be tricky. Here are six questions to ask yourself to help determine how much life insurance you need.
Do you have dependents?
Life insurance protects people who need your income after you die. If you have children who you support, a spouse or partner who needs your help paying the mortgage, or elderly parents you give money to, these are all people who depend on you. If at least one person needs financial help to support his or her lifestyle from you, then you should buy life insurance to protect that individual in the event of your untimely death.
What is your Income?
Life insurance is normally intended to replace your income. For instance, if you were making $30,000 per year, you would want to buy enough life insurance that the proceeds from the policy could be invested and the interest earned would generate the $30,000 each year to replace your income. As such, one shortcut to buying life insurance is to buy a policy equal to 10 times your income. So, in the case of the $30,000 income, you’d need a $300,000 life insurance policy.
What is your Mortgage?
If you have a mortgage, most financial experts recommend buying enough life insurance to pay it off in full. This is in addition to having enough to replace your income. So, if your mortgage is $100,000 and you need a $300,000 policy to replace your income, you’d want a policy with a total death benefit of $400,000.
How much other debt do you have?
You don’t want to leave your loved ones with a lot of debt to pay off. If you have loans, credit card balances or other money you owe in addition to your mortgage, add enough to the life insurance policy to pay that off as well.
What about your assets?
If you have a lot of assets- cash in the back, investments, etc.- then this money can be used by your dependents to support themselves or pay off debt when you die. This means your life insurance policy can be reduced by the amount of assets you have.
Will your situation change in the future?
It is always easier, and less expensive, to buy life insurance when you are young rather than when you are old. This means you should think about the future and buy enough life insurance now that you won’t need to upgrade your policy later. If you plan to have kids, for example, buy a larger policy with the plan being that they may some day be dependent upon you. By future-proofing your policy, you can get the best deal and make sure you are covered for any eventualities.