How Much Life Insurance do I Need

October 26, 2010

by Glenn Cooke

How much life insurance should you buy? The answer to that question is as individual as your circumstances. You’ll need to evaluate the reason you’re buying life insurance in order to properly answer this question. Once you can specifically answer the question “Why am I buying life insurance” you should be a long way towards determining a proper amount.

The biggest pitfall most people make in deciding how much life insurance they need is in treating this purchase as an emotional decision. Life insurance is a financial product and should be treated as such. Looking at an amount of life insurance and thinking ‘that’s too much’ can leave you drastically underinsured, and worse, leave your dependents without enough coverage in the event of your death.

The second most common pitfall in determining the amount of life insurance you need is using insurance to cover debt. While initially one might be tempted to ‘cover your mortgage’ this goes against the premise of insurance which is to insure against a loss. Instead you should be looking at what you loose financially upon your death.

As noted above, the first question you need to ask yourself is ‘why am I buying life insurance?’. For most of us with dependents and a debt load the reason behind purchasing life insurance is so that our dependents can maintain their lifestyle in the event of the death of an income earner. In short, most of us are looking to maintain a standard of living for our dependents in the event of our death. That’s the need and directly leads us to the answer of how much life insurance we need.

So you want to maintain your dependent’s standard of living in the event of your death. How are you maintaining your current standard of living? Again for most of us, that’s done through our paycheck or our income. You are maintaining your standard of living through your income – you’re paying your mortgage and other debts, buying groceries, and all the other necessities involved in daily living. If you should die, you lose your paycheck – and consequently the ability to maintain your dependents’ standard of living.

Very directly, the easiest way to ensure that your dependents maintain their standard of living is to provide a replacement paycheck upon your death. And with that number (your income that needs to be replaced) an insurance agent can easily calculate how much life insurance you’ll need to provide a replacement income.

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Article provided by Financial One.

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