How much Life Insurance do I need?

Life Insurance Policies amounts are different for everyone. There are essentially two factors that come into play when purchasing life insurance. The two factors are how much money would it take for your family to maintain the same standard of living and how much can you afford to pay per month for your premium.

Try our Life Insurance Calculator

How much would it take for my family to maintain the same standard of living?
Your Life Insurance Policy should greatly depend on how much money your family will need to maintain the same standard of living. This means that there is a certain monthly or yearly income needed to pay for minor and major expenses such a mortgage, cars and Education. Depending on your situation your life insurance needs will differ. If you have children that are young and have not attended College assume they will need funding. Calculate the approximate costs of College and add this into your overall expenses. In addition to College or Education costs calculate your mortgage and car payments into your expense report. Finally, calculate any additional expenses needed to maintain the same standard of life. Depending on your investment knowledge and death benefit received one can usually shop around and find a financial advisor they are comfortable with. A financial advisor should be able to place your money in the market and receive at least 5% returns per year. More often, returns can total 8%+ depending on investment amount. Approximate your taxes on the returns at 35% and you will have your yearly income. Divide the yearly income by 12 and this is your montly income to pay expenses.

For example, your family has $8,000 in expenses per month. You will need approximately $3,000,000 in coverage. This is likely a conservative amount of life insurance as $3,000,000 earning 5% interest yearly equates to $150,000 in yearly income. With taxes taken out your yearly income would be approximately $97,000 or $8,000 per month.

How much can I afford to spend on Life Insurance?
One should only consider an amount of Life Insurance where the yearly premium is easily attainable and not reallocated from another major expense. Be smart when purchasing your life insurance policy. Know your limits, as if you purchase a policy and cancel it due to the fact that you cannot afford the payments then you will receive $0 back from that purchase and you will not receive any for your death benefit.

Find that happy medium where you are comfortable with the cost of the premium and the amount of coverage it provides to sustain the same standard of living for your family.