Determining whether or not you need life insurance coverage is just the first step. Once you know you need a policy, you need to decide how much coverage you require.
Many people believe that coverage is based on yearly income alone, but it’s worth considering all of the factors below when coming to a decision.
Your debt
In the event of death, your debt can be passed on to your spouse, children and even parents, as well as anyone who cosigned a loan or holds a joint account with you. Protect these people by making certain that your life insurance policy covers the amount of debt you have.
Monthly household spending
Rather than taking out a policy based on what you earn, consider what your household spends each month. If you save a significant percentage of your income and are looking to ensure that your family can get by month to month in the event of your death, monthly household spending may be a better basis for your policy.
Years until retirement
Life insurance is intended to ensure that your family can survive in your absence. If you and your partner are young, you may be able to assume that your partner will still be working and will be able to provide for themselves. However, if you are at or near retirement age, your partner could struggle to find work if needed.
Special needs dependents
If you are supporting those who cannot live independently, you need to take into account what it will cost to sustain them over a lifetime. This can significantly increase the amount of coverage you need, requiring multiple or specialized policies.
Projected inflation
Finally, you may want to consider projected inflation over the term of your life insurance policy. This is impossible to predict over a lifetime, but you can get a rough estimate for a term-life policy. Just keep in mind that, when taking out coverage, $500,000 dollars now will have a different value in 10 years.
Once you know the coverage you need, speak to an experienced insurance broker to determine the best policy for you.
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