How Much Life Insurance Do You Need?

One reason for choosing a life insurance policy is to ask yourself a question: How much will my dependents need to survive if I am gone? Going through this simple exercise will help you determine the amount of Life Insurance you should get:

L – Loans and Mortgages. In case of your premature death how will your loved ones be able to afford to stay in the house with a large outstanding mortgage? If, for example, it is $200,000 then a life insurance paying this amount will be necessary.

I - Income Replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income for 10, 20 or even more years. Say, you want this income to continue for at least 20 years, then you will need a $800,000 policy ($40,000 x 20 = $800,000).

F – Final expenses. Depending on funeral arrangements the costs can easily add up to $20,000. Therefore, it is a good idea to incorporate this amount into the total amount of life insurance needed.

E – Extras such as future obligations: If you want to pay for your child's future college tuition, which, depending on a college, may be $80,000 for a 4-year education, you will have to add this to the amount of coverage too.

Adding everything together, you will probably want a life insurance policy for $1,100,000 ($200,000 to pay off the mortgage + $800,000 to replace yearly income + $20,000 funeral expenses + $80,000 university expense).
Once you determine the needed amount of coverage, you can start shopping around for the right type of life insurance policy and a good deal.
Obviously, there are other people in your life who are important to you, and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. If you have a spouse or partner that also is a contributor to the family income, then it would make sense to go through the same exercise to determine the face value of the policy on her/him.