While 59% of Americans have life insurance, many of them report that they feel they’re underinsured. In fact, one insurance group even estimated that there are coverage gaps up to $225,000.
Just how much life insurance do you really need? It depends on a lot of different factors. Basically, you need enough life insurance to pay for your normal financial responsibilities after you’ve passed away.
Here are six tips that can help you discern how much life insurance you need in order to ensure that your loved ones and your assets will be taken care of after you’re gone.
How Much Life Insurance Do You Really Need?
1. Decide What You Want to Cover
Making the decision to get a life insurance policy means that you’re looking forward to the future and thinking about what you’d like to happen after you’re gone. In this vision, think about what you’re going to want to cover.
Forbes released a study showing that the number one reason people buy life insurance policies is to cover burial or final expenses. An overwhelming 84% of people said that was one of the most important factors. Other top reasons were to supplement retirement income, to transfer wealth, and to help pay off a mortgage.
2. Factor in Assets & Debt
Aside from covering expenses such as funeral or end-of-life costs, you’ll want to factor in your debt and assets into the total amount. While this namely includes a home mortgage, it includes other large debt such as student loans, costly auto loans, or any other large loans you know your surviving family members might have to pay off.
3. Multiply Your Income by 10
As a good rule of thumb when deciding how much life insurance you need, it helps to multiply your income by 10. If you have young children, multiply it by how many years there are until they graduate high school or college.
Why multiply your income by 10? It ensures that your family will not only have that full cushion for the year following your passing but also that they’ll be able to invest money in ways that you might have to ensure that they can continue to grow the family’s wealth.
4. Think About Your Children’s College Expenses
As mentioned, if you have kids, you’re going to want to factor those costs into your policy. Depending on how old they are, you might also want to consider a policy that will cover the costs of sending them off to college.
This is actually pretty simple. Think about the highest cost of tuition that your child could eventually need and include that in the overall payout. Unfortunately, while most insurance companies offer unique riders, this isn’t one of them. So, just consider it when you’re totaling up your policy amount.
5. Ask About Funeral Expenses
Not all life insurance policies cover funeral expenses, which means that you’ll want to be sure to ask about this. The last thing your loved ones need to think about as they move through various stages of grief is whether or not they can afford the cost of a proper funeral.
Some companies offer special funeral or burial insurance. Be sure to ask if it’s something you’re concerned about.
6. Look at Term Life Insurance
What kind of life insurance is the best? Most experts agree that term life insurance is the way to go. What’s the difference between whole life insurance and term life insurance?
As the name suggests, term life insurance is good for a specific date. Usually, the terms are 10, 20, or 30 years. Whole life insurance costs more in the long-run because it’s designed to cover you for your whole life, however long that is.
Term life insurance is best if you’re interested in leaving money for your family to pay off debt. It’s also the most cost-effective.
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