Life Insurance: How Much Coverage Do You Need?
By Determining how much money the folks you leave behind will need is one of the first things to think about when choosing a life insurance policy.
Consider the following factors before you decide:
Repayments of Debts (if Any)
It’s important to have enough in your policy to cover your debts along with the interest. A little more won’t hurt.
Replacement of Income
If you are the sole provider for your family, look for a policy payout large enough to replace your current income plus a little extra to protect against inflation.
Insuring Other People in Your Life
Most people consider insuring their loved ones. However, as a rule, you should insure only those people whose death would be a financial loss in addition to an emotional loss, like that of an income-earning spouse. The death of a child is no doubt emotionally devastating, but would not cause you any loss of money.
This also applies to people you have a financial relationship with, like business partners.
Calculations Guide
One way to calculate the face value is the standard-of-living method. This is based on the money your survivors would need to maintain their current standard of living after your death. The estimated amount is then multiplied by twenty.
Another way to do this is to multiply your current yearly salary by the number of years you have left until you retire. A 40-year-old man making $20,000 a year, for example, will need $500,000 ($20,000 x 25 years) in life insurance.