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How Much Life Insurance is Enough?
This is one of those “easy, but not always so easy” questions.
Paying off Debts
If you’re purchasing life insurance to meet a certain financial obligation, such as to pay off your home, or your debts, the answer is pretty simple. You want to make sure you have enough coverage to pay off the amount of your debt at death. Whatever amount that may be.
If you anticipate increasing your debt in the near future, it’s not such a bad idea to buy more coverage up front to make sure you have enough in place when that additional debt comes on board. That way you don’t have to buy a separate policy and possibly go through medical underwriting again.
Replacing an Income
This is one that can be a little more challenging to answer because you have to consider how much of your income you want to replace for your family and for how long.
People frequently ask, “Yeah, we get that, but are there any general “rules of thumb” you can use to make this simpler?” There are, but they are just broad guidelines, and you should always talk to your financial professional to make sure these amounts are right for you. Very simply, you can use a multiple of your annual income.
If you’re young and married, maybe have a house and no more than one child, you may consider three to seven times your annual income as a starting point for coverage.
As you expand your financial obligations and your family, and if you’d like to let your spouse raise your children without the pressure of working full-time, you could start with seven to ten times your annual salary for initial coverage.
Some things that may increase the amount of coverage you’ll need:
- A desire to provide for college education expenses for several children.
- Using insurance to pay off all debt AND provide an ongoing income
- Providing a sum of money that will generate an income without depleting the principal amount. As opposed to gradually spending down the life insurance over time.
Here are some things that could reduce the amount of coverage you may need to purchase:
- Employer-provided life insurance (as long as you’re employed)
- Spousal income
- Social Security Benefits
- Other personal savings
While these may reduce the amount of life insurance coverage you buy, make your estimates conservatively. It’s better to have too much coverage than too little.
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