It’s impossible to know the exact amount of life insurance you should purchase, but you can make a reasonable estimate based on several different factors regarding your financial situation and what your loved ones will need in the years following your passing.
There are many rules of thumb and life insurance calculators out there that are beneficial, but the truth is that different situations call for more detailed analysis and that “8-10 times your salary” is not sufficient for everyone. The purpose of life insurance is to allow your loved ones to continue a certain standard of living even after your death. This can relate to several different factors and it’s best to speak with an agent to determine how much would be best for you, but to start, some important things to consider include:
Sum of debts: This can include your mortgage, credit card balances, student loan balances, car loans, and whatever other debts you would be leaving behind.
Education expenses: This is related the amount that will be necessary to put your children through school at the time they will enroll. It’s important to note that higher education becomes increasingly more expensive as time goes by. Also, if your surviving spouse would like to complete a college education, you could also set aside some money for that purpose.
Funeral expenses: In 2016, the average cost of a funeral and related expenses was between $7,000 and $10,000.
Income replacement: This accounts for the loss of income related to your passing. This is listed after the previous considerations as once the sum of debts, education expenses, and funeral expenses are covered your dependents will not necessarily need to replace 100% of your income. Of course, it also important to consider how many years of your income you’d like to leave behind.
Again, the amount of life insurance you need is an extremely complicated subject and the considerations above are only a starting point. The amount you need changes throughout your life as changes happen and speaking with a professional about your situation is the best way to make sure you’re fully covered at all stages of life.