Deciding to buy life insurance isn't difficult. Knowing how much coverage you need can be a bit more challenging, however.
A helpful rule of thumb, which many people follow, is to buy eight to ten times your annual income in coverage. For a person earning $50,000 a year, this means they need a $500,000 to $600,000 policy. Before you decide on an amount, consider the following questions.
What's your cost of living?
You need to know your annual expenses to determine which side of the rule you should lean closer to. People in rural Kansas generally have lower expenses than those in New York City, for example.
Your spending habits are also a factor. People who shop the sales with coupons usually need less than those who shop whenever they want. For families who rely on two incomes, it's better to err on the side of a larger policy amount. If you're able to live well on your income, with room to save, you might choose a lower amount.
Do you have children or dependents?
For those who have children or plan to in the future, consider the costs and increase the life insurance. In unfortunate situations where a parent passes away while they have kids still at home, this leaves the other parent with extra expenses. The life insurance money needs to cover child-related expenses. This removes the financial burden on the remaining parent.
Are both partners working?
Many couples rely on both incomes to pay their bills. If one is gone, then that extra income would come from the life insurance money. It's okay if the income that's produced by the life insurance payout can be less than their current income. This is because several expenses are also eliminated when a person passes away. You no longer have some of life's biggest expenses like health and auto insurance or a car payment. In situations where only one parent works, the other parent still needs insurance.
Your insurance professional can also help you determine the best amount for you. When in doubt, choose a larger policy. Life insurance is usually quite affordable. You'll also have peace of mind knowing your loved ones aren't burdened financially. You need to create an estate plan that says where the life insurance money should go. This can be an index or mutual fund. This will allow the money to produce income for your heirs while preserving the life insurance payout.